The U.S. government budget crisis weighed heavily on investors after President Barack Obama said Tuesday he would not negotiate with the Republicans under the threat of “economic chaos.”
Investors are still hopeful Congress can avert an unprecedented U.S. government default by agreeing to lift the debt ceiling before an Oct. 17 deadline.
“Any sane person obviously believes the U.S. isn’t going to default. That would cause an earthquake in financial markets around the globe,” Laurence Booth, a finance professor at the University of Toronto’s Rotman School of Management, said in an interview Tuesday.
The issue is expected to dominate meetings next week of the International Monetary Fund, the World Bank and the finance ministers from the G20 countries, including Canada’s Jim Flaherty.
The IMF warned Tuesday that a U.S. government default could “seriously damage” the world economy.
Obama said a default would be “catastrophic.”
Here’s what you need to know about the U.S. budget crisis:
1. What is the debt ceiling?
The debt ceiling is the limit Congress sets on the amount the U.S. government can borrow to fund its operations. It’s currently at $16.7 trillion.
The government occasionally bumps up against the ceiling. Usually, Congress agrees to raise it with little fanfare. But not this time.
2. What happens on Oct. 17?
That’s the date the U.S. treasury department says it will hit the debt ceiling, which means it can’t borrow any more money to fund its operations unless Congress agrees to raise the limit.
3. Why is there a debt-ceiling impasse?
The Republicans want the Democrats to agree to spending cuts in exchange for raising the debt ceiling. The Democrats have said no.
4. What would happen if the U.S. government defaulted?
It would have to stop paying about a fifth of its bills. (The U.S. government funds about 20 per cent of its operations from debt.) It could also end up defaulting on its loan payments.
5. What are the odds of a U.S. debt default?
Investors are betting the odds are very low, mostly because it would wreak so much global havoc.
With the U.S. dollar and U.S. treasury bonds forming the backbone of the international financial system, there’s just too much riding on the world’s largest economy.
“International financial markets would go haywire. It would be like a financial 9/11,” said Brandon Tozzo, a Queen’s University expert in American politics.
6. Why is the U.S. government shut down?
The government had to shut down on Oct. 1 because Congress failed to approve a federal budget for the fiscal year, which begins on that date.
About 800,000 federal workers were immediately furloughed, though about 350,000 have since been recalled. Essential services, such as border security and the military, continue to operate.
Congress failed to reach an agreement because the Republicans want the Democrats to agree to repeal portions of the Affordable Health Act, also known as Obamacare.
7. What’s the impact so far?
The mere threat of a default in the summer of 2011 led to a market correction and downgrade of the U.S. credit rating.
A prolonged U.S. government shutdown could slow the economy’s already tepid growth rate.