On Wednesday, 16 October, the United States Congress and President Barack Obama finally reached an agreement on the budget for the 2014 fiscal year that would reopen the government after a two-week shutdown. If this deal had not been reached by 17 October, the U.S. government would have defaulted on its national debt obligations, greatly affecting the global economy.Last weekend, IMF chief Christine Lagardespoke on behalf of financial leaders across the world and expressed fears that a U.S. default would mean a “lack of trust in the US signature, it would mean massive disruption the world over, and we would be at risk of tipping, yet again, into recession.” The bill to reopen the government was passed through both the House of Representatives and the Senate early Thursday morning, with the President signing it into law at 12:30 am EST.
The United States government shutdown began on 1 October, the beginning of the fiscal year, as the Republican House of Representatives and Democratic Senate came to a gridlock regarding the budget for FY2014. Republicans, in yet another attempt to overturn President Obama’s health care bill, refused to support a budget that funded the legislation. Although President Obama negotiated around the debt ceiling in 2011, he declared that he would not allow the Republicans to use it as a bargaining chip against his health care bill.
If the stalemate between the Republicans and the Democrats had continued any longer, failing to raise the government’s 16.7 trillion dollar debt ceiling, the government’s borrowing authority would have been depleted. Earlier this week, both the House and the Senate were unsuccessful in attempts to reach a solution that would reopen the government and extend the Treasury’s debt limits. House Speaker John Boehner, a Republican representative from Ohio, failed in multiple efforts to rally enough support by either party behind a bill to end the shutdown.
The bill proposed on Monday to reopen the government until mid-January, postpone the debt ceiling until 7 February, delay the tax on medical devices, and deny lawmakers and their staffs from subsidies on the new health insurance exchanges; however, Boehner did not have the support of the far-right Republicans, and the Democrats refused to offer assistance in getting the bill passed.
Thus, in the final deal reached Wednesday night, the Republicans gave up on their demands for changes regarding the health care legislation in order to avert a devastating default. The bill funds the government through 15 January and raised the debt ceiling until 7 February, reopening the government the morning of 17 October. Moreover, the House and Senate must form a budgetary blueprint for the next decade by 15 December, but many fear that the chasm between the parties is too wide to bridge during the next round of negotiations, bringing the government to yet another standoff in a few months time.
The Fitch Ratings agency put the United States on a “negative ratings watch”, noting that a default on its debt ceiling would have led to a downgrade from its triple-Acredit rating. According to the U.S. Treasury Secretary, the U.S. ran out of “extraordinary” measures to implement before the 17 October expiration date of the debt ceiling, thus, leaving the country with merely 30 billion U.S. dollars in its reserves. The prolonged debate over the debt ceiling that has continued since the fall of 2011 has now called into question the role of the dollar as the dominant currency of global assets.
The effects of the U.S. government shutdown were felt across the Atlantic, as many are now suspect of America’s capacity to provide the world with a sense of stability. The lack of credibility and confidence in the U.S. has led to a drop in the stock markets across Europe and Asia and could further damage growth in investment and spending worldwide. European Central Bank chief Mario Draghi stated the persisting U.S. government shutdown posed a great risk for the recovering Eurozone. If the stalemate had resulted in a default, the dollar was expected to further lose value against the euro, driving up prices for European goods within the U.S., who Europe relies heavily on as a consumer of 143 billion euros of its exports. Therefore, the U.S. government shutdown serves as a reminder to the European community that we must not rely on a seemingly stable recovery of the global economy to assist us as we emerge from the financial crisis.