 "Investors jittery over US debt ceiling crisis")
A political faceoff in the US over its government’s proposal to raise country's debt ceiling is expected to keep stock investors world-wide, including in India, on the edge in the days ahead. Economists and analysts said failure to increase the debt limit by October would result in the US defaulting on its loans, which could potentially damage sentiment in global financial markets.
A similar political showdown between Democrats and Republicans in 2011 over raising the debt limit had gone down to the wire. Though it was resolved through some last minute negotiations, it led to ratings agency Standard and Poor’s stripping the US of its top-notch credit rating, sparking a sharp sell-off across global markets.
This time too, investors are expecting a similar outcome with neither of the parties willing to budge.
"The US debt ceiling issue is certainly a potential time-bomb and can cause a lot of anxiety in the market,” said UR Bhat, managing director, Dalton Capital Markets.
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US laws say a government can spend only if it has enough money coming from taxes or within the borrowing limits. The debt ceiling limits the Treasury’s ability to borrow for the government’s programmes in the absence of adequate revenues. The increase in the debt cap requires the approval of both houses. While Democrats, including US President Barack Obama, are favoring tax increases and lower spending cuts, Republicans want a cut in the social programmes including Affordable Care Act, known as Obamacare.
Obama has said any move to delay his healthcare program would be vetoed, while Republicans argue that the healthcare law would damage the economy.
“Investors are quite jittery because the political battle has only escalated. The Republicans may not want Democrats to score one more win after Obama managed to diffuse the Syria crisis,” said Tirthankar Patnaik, Director, Strategist-Institutional Research, Religare Capital Markets. “Indian markets will react negatively to such negative news from the US”.
Still, there are hopes that the US would resolve the issues before the world’s largest economy actually defaults.
“One can take comfort that these things are part of a democratic set up and hope that they will be resolved soon without causing too much damage to the markets," said Bhat.