By November 3rd, the U.S. government will run out of cash. Again.
Judging from the U.S. government shutdowns of 1995-1996 and the debt ceiling crises of 2011 and 2013, we might be tempted to assume that this year’s debt crisis will follow the same tried-and-true storyline: A few weeks of dramatic fiscal brinksmanship, followed by a bold yet pragmatic budget deal.
While it is likely that this year’s crisis will follow a similar script, there may be some surprises in store for us this year, as our fractured Congressional leadership faces off against a growing public appetite for “outsider politics” and political risk-taking.
As this year’s battle heats up, we must remember that taking a “management-by-crisis” approach comes at a price to bond issuers and investors:
- 2011: Standard & Poor’s downgraded America’s credit rating from AAA to AA+, which sparked the most volatile week for financial markets since the 2008 crisis.
- 2013: Investors avoided near-dated Treasury bills, raising government borrowing costs and driving prices lower.
- 2013: Rating agency Fitch threatened a U.S. credit rating downgrade, calling the debt ceiling an “ineffective and potentially dangerous mechanism for enforcing fiscal discipline.”
Fortunately, these costly crises have not been entirely for naught, as they paved the way for the multi-year spending agreements of 2011 and 2013.
Will 2015 be any different?
Unfortunately, there seems to be little incentive for that. So, as the political sparks start to fly, investors will be looking for a speedy and workable resolution, with a minimum of uncertainty along the way. [Get your popcorn.]
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