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Global Markets Calm on First Day of US Government Shutdown

Global Markets Calm on First Day of US Government Shutdowni
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October 01, 2013 10:56 PM
On Tuesday, financial markets, by and large, shrugged off the first U.S. government shutdown in 17 years. Analysts believe the shutdown is likely to be short-lived but others worry a prolonged stand-off could wreak havoc on the global economy. Mil Arcega has more.
On Tuesday, financial markets, by and large, shrugged off the first U.S. government shutdown in 17 years.  Analysts believe the shutdown is likely to be short-lived but others worry a prolonged stand-off could wreak havoc on the global economy. 

While the back and forth continued in Washington, “The House has made its position known very clearly," said Republican Speaker of the House John Boehner.

“Madame President, it is embarrassing," said Democratic Leader of the Senate Harry Reid.

Financial markets around the world watched from the sidelines, waiting for cooler heads to prevail.

“I think the market is convinced that a deal eventually will be reached but right now they are really in wait and see mode," said market strategist Mike Ingram.

If resolved quickly, many investors believe the economic impact of the government shutdown will be minimal.  Investment manager Patrick Armstrong says the danger lies in not knowing when.

“The longer it does drag on the more impact it will have, because it will have consequences on consumer confidence, the unemployment rate kicks up as you’ve got government workers who aren’t employed," he said. "And it will probably create a bit more uncertainty about the budget crisis that’s looming at the middle of this month as well."

He’s referring to the country’s $16.7 trillion debt.

Unless Congress reaches a deal on raising the debt limit this month, the U.S. Treasury says the country will run out of money to pay its debts.  

Economist Eric Chaney says the longer the political stand-off continues, the greater the risk that people who hold U.S. Treasury bonds  will not get paid.  
 
“If the government shutdown in the U.S. lasts more than a week, people will start to think that “Okay, the deadline for the debt ceiling, which is around the 17th of October is not going to be met,” he said. "In that case, the risk is a risk of default.  And I think in that case, we might have a very negative reaction."

If that happens, analysts say the dollar’s value will fall, interest rates will rise and the U.S. could see another credit downgrade.   

The prospect of a U.S. default is especially troubling in Asia, where stock prices were rising on manufacturing gains.  

South Korean TV newscasters voiced the concerns this way:

“If the United States federal government’s temporary shutdown is prolonged, not only America but the world’s economy could be affected negatively.”

Still, European stocks were mostly higher Tuesday.  

And on Wall Street - where stock prices have fallen in seven of the past eight sessions - investors took advantage of bargain prices, sending major indexes into positive territory.  

Analysts predict the trajectory will change the longer the U.S. budget crisis continues.

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