By David Galloway, 15 October 2013
It is this scenario that is leading to much anxiety among investors around the globe. David Galloway, strategist at Sanlam Multi Manager International (SMMI), shares his insights on why a debt limit impasse is unlikely to happen.
“Despite the grim possibilities, our base case view is that some form of agreement will be reached. This could be in the form of a short-term agreement that provides funding for only a few months, or a more comprehensive agreement that would fund the US government for the entire fiscal year, while also raising the debt ceiling. SMMI favours the latter outcome as it would bring certainty back to markets,” he says.
Galloway says the consequences of not reaching an agreement could be devastating for the global economy with the exact outcomes unknown, since the US would be sailing in unchartered waters. These consequences could include:
Although this is not the first time the US government has been shut down, it would be the first time the US has ever defaulted on its debt obligations. The government has shut down 17 times, the last event taking place in 1995 and 1996. In each instance, however, the opposing sides eventually reached some form of agreement.
In light of the sheer magnitude of the potential fallout from a debt default, our base case view remains that the debt ceiling will be resolved. We believe that despite the political posturing taking place, politicians’ self-preservation instincts and the fear of an unprecedented backlash from the electorate should the US default will ultimately take centre-stage and ensure an agreement is reached.
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