Why are the markets so calm about the US shutdown and debt ceiling debates?

The "Fear Index" is languishing at 17.

The government of the world’s largest economy is shut down and the current debt limit of $16.699 trn was expended in May. Since then the US Treasury has only managed to keep the show on the road by using what it calls "extraordinary measures" but even they will all have been exhausted by 17th October, (-ish).

It now looks increasingly likely that the two questions of passing the Continuing Resolution Bill to allow the government to keep spending money, and raising the debt ceiling, so that the US can repay principal and interest as they become due on current debt, and subsequently issue yet more IOU’s, will become co-mingled.

The trouble is that there is now a three party system in the States; Democrats, Republicans and the Tea Party, and the latter seem to have become almost impossible for House Speaker Boehner to rule, as evidenced by their insistence that the Continuing Resolution Bill was sent to the Senate only following the addition of amendments that would de-fund President Obama’s cherished Affordable Healthcare Act. Amendments that stood zero chance of ever getting through the Democratic controlled Senate.

The moderate wing of the Republican Party is now livid with the Tea Party-one gathers Republican Senators recently fired a volley of angry questions at prominent Tea Party member Ted Cruz, (he of the recent 21-hour filibuster on this matter), their main point being to ask what is his overall strategy, how did he ever think in a million years that he or the Republicans as a whole would come out of this in better shape for next year’s mid-term Congressional elections?

In the chilling words of Vanderbilt University public policy professor Bruce Oppenheimer, "The thing that's different about these Republicans, (the Tea Party), is their unwillingness to bargain," and  "I'm not sure if it's because they lack government experience or they've made such strong promises to their constituencies, but they've put their feet in cement and can't or won't move."

This will very probably end with Boehner leading enough Republicans into a deal to vote with Democrats to get the requisite legislation through, even if this contravenes a party policy known as the “Hastert rule” which prevents a bill getting to the floor that doesn’t command majority Republican support.

A further disturbing factor was the Treasury’s perhaps naïve assurance that in fact Oct 17th isn’t a firm deadline, as they can russle up another $30bn to keep things going to the end of the month.

What I find most chilling, however, is the markets insouciance towards the whole debate, especially the debt ceiling. The Vix Index of equity market volatility, the so-called "Fear Index", is languishing at 17, whereas it reached 48 during the last debt ceiling impasse in August 2011, as the S and P 500 Index fell 15 per cent in a matter of days. Admittedly simultaneously the Eurozone crisis had markets on the edge then, but one gets the distinct feeling that everyone now believes there will be eventual agreement, and sees any dip in prices as a chance to buy stocks, or is sitting comfortably overweight.

Markets always cause the most pain they possibly can; in a world where everyone thinks a solution will be found, but actually has no idea how, there is a distinct chance that before this is over the markets suddenly wake up to the gravity of the risks involved and suffer a very significant pull-back, if not a crash.

Photograph: Getty Images

Chairman of  Saxo Capital Markets Board

An Honours Graduate from Oxford University, Nick Beecroft has over 30 years of international trading experience within the financial industry, including senior Global Markets roles at Standard Chartered Bank, Deutsche Bank and Citibank. Nick was a member of the Bank of England's Foreign Exchange Joint Standing Committee.

More of his work can be found here.

Photo: Getty Images
Show Hide image

I'm far from convinced by Cameron's plans for Syria

The Prime Minister has a plan for when the bombs drop. But what about after?

In the House of Commons today, the Prime Minister set out a powerful case for Britain to join air strikes against Isil in Syria.  Isil, he argued, poses a direct threat to Britain and its people, and Britain should not be in the business of “outsourcing our security to our allies”. And while he conceded that further airstrikes alone would not be sufficient to beat Isil, he made the case for an “Isil first” strategy – attacking Isil now, while continuing to do what we can diplomatically to help secure a lasting settlement for Syria in which Assad (eventually) plays no part.

I agreed with much of David Cameron’s analysis. And no-one should doubt either the murderous barbarism of Isil in the region, or the barbarism they foment and inspire in others across the world.  But at the end of his lengthy Q&A session with MPs, I remained unconvinced that UK involvement in airstrikes in Syria was the right option. Because the case for action has to be a case for action that has a chance of succeeding.  And David Cameron’s case contained neither a plan for winning the war, nor a plan for winning the peace.

The Prime Minister, along with military experts and analysts across the world, concedes that air strikes alone will not defeat Isil, and that (as in Iraq) ground forces are essential if we want to rid Syria of Isil. But what is the plan to assemble these ground forces so necessary for a successful mission?  David Cameron’s answer today was more a hope than a plan. He referred to “70,000 Syrian opposition fighters - principally the Free Syrian Army (FSA) – with whom we can co-ordinate attacks on Isil”.

But it is an illusion to think that these fighters can provide the ground forces needed to complement aerial bombardment of Isil.  Many commentators have begun to doubt whether the FSA continues to exist as a coherent operational entity over the past few months. Coralling the myriad rebel groups into a disciplined force capable of fighting and occupying Isil territory is a heroic ambition, not a plan. And previous efforts to mobilize the rebels against Isil have been utter failures. Last month the Americans abandoned a $500m programme to train and turn 5,400 rebel fighters into a disciplined force to fight Isil. They succeeded in training just 60 fighters. And there have been incidents of American-trained fighters giving some of their US-provided equipment to the Nusra Front, an affiliate of Al Qaeda.

Why has it proven so hard to co-opt rebel forces in the fight against Isil? Because most of the various rebel groups are fighting a war against Assad, not against Isil.  Syria’s civil war is gruesome and complex, but it is fundamentally a Civil War between Assad’s forces and a variety of opponents of Assad’s regime. It would be a mistake for Britain to base a case for military action against Isil on the hope that thousands of disparate rebel forces can be persuaded to change their enemy – especially when the evidence so far is that they won’t.

This is a plan for military action that, at present, looks highly unlikely to succeed.  But what of the plan for peace? David Cameron today argued for the separation of the immediate task at hand - to strike against Isil in Syria – from the longer-term ambition of achieving a settlement in Syria and removing Assad.  But for Isil to be beaten, the two cannot be separated. Because it is only by making progress in developing a credible and internationally-backed plan for a post-Assad Syria that we will persuade Syrian Sunnis that fighting Isil will not end up helping Assad win the Civil War.  If we want not only to rely on rebel Sunnis to provide ground troops against Isil, but also provide stable governance in Isil-occupied areas when the bombing stops, progress on a settlement to Syria’s Civil War is more not less urgent.  Without it, the reluctance of Syrian Sunnis to think that our fight is their fight will undermine the chances of military efforts to beat Isil and bring basic order to the regions they control. 

This points us towards doubling down on the progress that has already been made in Vienna: working with the USA, France, Syria’s neighbours and the Gulf states, as well as Russia and Iran. We need not just a combined approach to ending the conflict, but the prospect of a post-war Syria that offers a place for those whose cooperation we seek to defeat Isil. No doubt this will strike some as insufficient in the face of the horrors perpetrated by Isil. But I fear that if we want not just to take action against Isil but to defeat them and prevent their return, it offers a better chance of succeeding than David Cameron’s proposal today. 

Stewart Wood is a former Shadow Cabinet minister and adviser to Ed Miliband. He tweets as @StewartWood.