Can they kick it? Yes they can

October 15, 2013

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During the recent round of financial crises, policymakers have done a whole lot of “kicking the can down the road”.

The latest is taking place in the United States where a fiscal stalemate between Republicans and Democrats has forced the first partial government shutdown in 17 years.  It has also raised concerns about a U.S. debt default, should the government not meet a deadline this week of raising the debt ceiling. That has kept short-term U.S. interest rates and the cost of insuring U.S. debt against default relatively elevated.

While markets remain convinced there will be a last-minute deal – because the consequences are far to dire for there not to be – their performance has ebbed and flowed with the mixed messages from Washington.

Despite some optimistic rumblings early on Monday, the day ended with further discord and disagreement. The plan currently under discussion would promptly end a shutdown about to enter its third week. It would also raise the debt ceiling by enough to cover the nation’s borrowing needs at least through mid-February 2014, according to a source familiar with the negotiations.

But analysts say this does not solve the problem over the long-term. According to Philip Tyson, strategist at ICAP:

There seems to be some progress being made but the solution that is being proposed is far from perfect. It’s short-term, it’s just pushing the problem further along for a few months.

Nor is it certain that the market’s optimism will be validated, as shown by recent history. Commerzbank senior interest rate strategist Michael Leister says:

We had basically a similar scenario at the end of last week, when it seemed that a deal was imminent and we didn’t get it in the end.

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