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.

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Lord Empey: Northern Ireland likely to be without government for a year

The former UUP leader says Gerry Adams is now in "complete control" of Sinn Fein and no longer wants to be "trapped" by the Good Friday Agreement

The death of Martin McGuinness has made a devolution settlement in Northern Ireland even more unlikely and has left Gerry Adams in "complete control" of Sinn Fein, the former Ulster Unionist leader Reg Empey has said.

In a wide-ranging interview with the New Statesman on the day of McGuinness’ death, the UUP peer claimed his absence would leave a vacuum that would allow Adams, the Sinn Fein president, to consolidate his hold over the party and dictate the trajectory of the crucial negotiations to come. Sinn Fein have since pulled out of power-sharing talks, leaving Northern Ireland facing the prospect of direct rule from Westminster or a third election in the space of a year. 

Empey, who led the UUP between and 2005 and 2010 and was briefly acting first minister in 2001, went on to suggest that, “as things stand”, Northern Ireland is unlikely to see a return to fully devolved government before the inquiry into the Renewable Heat Incentive scheme is complete -  a process which could take up to a year to complete.

“Adams is now in complete control of Sinn Fein,” he said, adding that it remained unclear whether McGuinness’ successor Michelle O’Neill would be “allowed to plough an independent furrow”. “He has no equal within the organisation. He is in total command of Sinn Fein, and that is the way it is. I think he’s even more powerful today than he was before Martin died – by virtue of there just being nobody there.”

Asked what impact the passing of McGuinness, the former deputy first minister and leader of Sinn Fein in the north, would have on the chances of a devolution settlement, Empey, a member of the UUP’s Good Friday Agreement negotiating delegation, said: “I don’t think it’ll be positive – because, for all his faults, Martin was committed to making the institutions work. I don’t think Gerry Adams is as committed.

Empey added that he believed Adams did not want to work within the constitutional framework of the Good Friday Agreement. In a rebuke to nationalist claims that neither Northern Ireland secretary James Brokenshire nor Theresa May can act as honest or neutral brokers in power-sharing negotiations given their reliance on the DUP’s eight MPs, he said: “They’re not neutral. And they’re not supposed to be neutral.

“I don’t expect a prime minister or a secretary of state to be neutral. Brokenshire isn’t sitting wearing a hat with ostrich feathers – he’s not a governor, he’s a party politician who believes in the union. The language Sinn Fein uses makes it sound like they’re running a UN mandate... Gerry can go and shout at the British government all he likes. He doesn’t want to be trapped in the constitutional framework of the Belfast Agreement. He wants to move the debate outside those parameters, and he sees Brexit as a chance to mobilise opinion in the republic, and to be seen standing up for Irish interests.”

Empey went on to suggest that Adams, who he suggested exerted a “disruptive” influence on power-sharing talks, “might very well say” Sinn Fein were “’[taking a hard line] for Martin’s memory’” and added that he had been “hypocritical” in his approach.

“He’ll use all of that,” he said. “Republicans have always used people’s deaths to move the cause forward. The hunger strikers are the obvious example. They were effectively sacrificed to build up the base and energise people. But he still has to come to terms with the rest of us.”

Empey’s frank assessment of Sinn Fein’s likely approach to negotiations will cast yet more doubt on the prospect that devolved government might be salvaged before Monday’s deadline. Though he admitted Adams had demanded nothing unionists “should die in a ditch for”, he suggested neither party was likely to cede ground. “If Sinn Fein were to back down they would get hammered,” he said. “If Foster backs down the DUP would get hammered. So I think we’ve got ourselves a catch 22: they’ve both painted themselves into their respective corners.”

In addition, Empey accused DUP leader Arlene Foster of squandering the “dream scenario” unionist parties won at last year’s assembly election with a “disastrous” campaign, but added he did not believe she would resign despite repeated Sinn Fein demands for her to do so.

 “It’s very difficult to see how she’s turned that from being at the top of Mount Everest to being under five miles of water – because that’s where she is,” he said. “She no longer controls the institutions. Martin McGuinness effectively wrote her resignation letter for her. And it’s very difficult to see a way forward. The idea that she could stand down as first minister candidate and stay on as party leader is one option. But she could’ve done that for a few weeks before Christmas and we wouldn’t be here! She’s basically taken unionism from the top to the bottom – in less than a year”.

Though Foster has expressed regret over the tone of the DUP’s much-criticised election campaign and has been widely praised for her decision to attend Martin McGuinness’ funeral yesterday, she remains unlikely to step down, despite coded invitations for her to do so from several members of her own party.

The historically poor result for unionism she oversaw has led to calls from leading loyalists for the DUP and UUP – who lost 10 and eight seats respectively – to pursue a merger or electoral alliance, which Empey dismissed outright.

“The idea that you can weld all unionists together into a solid mass under a single leadership – I would struggle to see how that would actually work in practice. Can you cooperate at a certain level? I don’t doubt that that’s possible, especially with seats here. Trying to amalgamate everybody? I remain to be convinced that that should be the case.”

Accusing the DUP of having “led unionism into a valley”, and of “lashing out”, he added: “They’ll never absorb all of our votes. They can try as hard as they like, but they’d end up with fewer than they have now.”

Patrick Maguire writes about politics and is the 2016 winner of the Anthony Howard Award.