See US govt shutdown, fighting; but no default: Arnab Das

As far as the US debt ceiling issue is concerned, Arnab Das, managing director of market research and strategy, Roubini Global Economics does not think it will be violated either because it will be raised or because there will be some action to try and prevent a default. A default would have extreme economic and financial market impact, he says. Though he feels the dysfunction in Washington is so great that there is quite a good chance of a government shutdown and some vituperative fighting around the debt ceiling.

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According to him, there is some risk that the shutdown will be more material and force the Treasury into a much more aggressive form of triage in trying to decide what payments to prioritise and what payments could be sent to the backburner.
Das told CNBC-TV18, there was a high likelihood of a shutdown of the federal government and so had kind of pencilled in some sort of drag in the fourth quarter into its existing forecast. According to him, the consensus does not have that embedded, which is leading to the risk-off that is being witnessed. Below is the verbatim transcript of Arnab Das' interview on CNBC-TV18 Q: What do you make of the impact of both the impending government shutdown as well as the fact that the US will hit that debt ceiling in the middle of October?
A: I do think that markets had not really focused on pricing this in, because it is kind of a left tail risk that is very difficult to trade or position for, whether it is the shutdown or the risk of an actual default. We would agree with the consensus that at this stage we have been saying it for sometime at Roubini Global Economics that the dysfunction in Washington is so great that there is quite a good chance of a government shutdown and some vituperative fighting around the debt ceiling.
In the end we do not think that the debt ceiling will be violated either because it will be raised or because there will be some action to try and prevent a default. The default would be too terrible to contemplate and would have extreme economic as well as financial market impact. I think the shutdown is important as well.
One should not be too sanguine about this by comparing it simply to all the other 17 shutdowns. Most of those shutdowns occurred over a weekend and were resolved relatively quickly. Even if the politics was quite vociferous at those times it was not nearly as dysfunctional as it is now and there is some risk that the shutdown will be more material and force the treasury into a much more aggressive form of triage in trying to decide what payments to prioritise and what payments should be sent to the backburner. Q: In some the reports that I was reading it seemed that they could cut fourth quarter growth estimates by about 1-1.5 percent given that we might see a prolong government shutdown, the furloughs accompanying that and all that. Does that fundamentally change your view of what kind of number we are going to see in terms of GDP growth this year for the US and whether that will have a bigger impact across global markets?
A: We had the view that there was a high likelihood of a shutdown of the federal government and so had kind of pencilled in some sort of drag in the fourth quarter into our existing forecast. The problem is that the consensus does not have that embedded and so therefore we are seeing the kind of risk-off that you mentioned earlier. Whether it is 1.4 percent on an annualised basis or not depends on how significant the triage has to be because of the length of the shutdown that does take place.
In the end cooler heads are going to prevail and there will have to be a reopening of the government in relatively short order because of course the fourth quarter is very important one for the US because of thanksgiving, Christmas, everything else and nobody really wants to dislodge the economy. Although of course the trouble in this negotiation process is that both the speaker of the house and the president are weakened and that is allowing a bit of the fringe on either side to dominate the agenda, like the president by the Summers issue with regards to Fed chairman and also Syria. Q: What will happen today in Washington? By when will you say, yes it is going to be a shutdown?
A: I do not think there is going to be a shutdown until they announce that they have agreed not to agree and really today is the drop dead date for that eventuality. It is of course still possible that they will pull a rabbit out of the hat and have a continued resolution to keep the government funded, but each side is going to be demanding concessions and posturing quite a lot against the other. So I think it will really go down to the wire - that has been our expectation for sometime.