10 things you wanted to know about the US debt ceiling

Global markets are reeling under the selling pressure today on reports that the US could face its first government shutdown in 17 years. Here is a short primer on the government shut-down and its implication.

1) What is US government shutdown?

A government shutdown in US basically implies that that the government will stop providing funding for all but essential services. This situation usually arises when the President, the Senate and the House are unable to agree on a budget that is important for the functioning of the government.

2) Has this happened before?

The last shutdowns occurred during the budget battle between the Republican-controlled Congress and President Bill Clinton in late 1995. Much of the federal government was closed for five days in November 1995 and then from mid-December 1995 to early January 1996.

3) When is the deadline?

There are two deadlines. First is October 1 which is a new budget year in the US and requires Congress to pass a spending bill to allow agencies to stay open. Second one is October 17 which requires Congress to increase the government's $16.7-trillion debt ceiling to avoid a first-ever default on its payments.

4) What is the impact on US economy, if October 1 deadline is missed?

US politicians have been unable to reach an agreement on budget spending thus far. They face a deadline of midnight on Monday, after which the government will shut down, meaning that 800,000 federal employees would be put on temporary leave. 

5) Will this lead to complete shutdown of US government functioning ?

The effects of a shutdown would not be immediately felt by most Americans. Essential government programs such as air traffic control, Social Security, Medicare and mail delivery would all continue, but national parks and museums would be closed, and agency operations would slow down or stop. The White House and the US Congress would continue to operate as well.

6) What are global stock markets factoring?

Most analysts agree that a shutdown now looks imminent, but acknowledge that this has happened before and is unlikely to last long.

7) What is ObamaCare?

In March 2010, US President Barack Obama signed into law the Affordable Care Act (known as ObamaCare) – a bill to deliver the most sweeping health-care reforms in the United States.

8) How does US government shutdown concerns ObamaCare ?

Current funding for the government is set to expire today, and lawmakers must approve the stopgap bill in order to keep government running. The bill extends the current rate of government spending at $986 billion a year.

House Republicans attached a provision to defunct the Affordable Care Act or ObamaCare. However, the provision faces a veto threat from Obama in the Democratic-controlled Senate.

9) What is the likely impact on US Federal Reserve's decision on QE3 taper?

US Federal Reserve is likely to hold the tapering of its $85 billion bond-buying programme at least until December as the economy is still fragile and recovery is underway.

Analysts are currently expecting S&P 500 calender year 2013 earnings growth to come in at 6.03 percent, down from the April 1 estimate of 7.41 percent, global market report suggests.

10) How will other world economies and markets be impacted?

Global stock markets are spooked by the reports that the world’s biggest economy could face a shut-down, injecting massive amounts of uncertainty into major asset classes. If the shutdown is prolonged, it could also have significant implications for global economic growth.