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US Shutdown

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    SHUTDOWN

    US

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    How it all Triggered ??

    From October 1 to 17, 2013, the United States federalgovernment entered a shutdown and curtailed mostroutine operations after Congress failed to enactlegislation appropriating funds for fiscal year 2014, or acontinuing resolution for the interim authorization of

    appropriations for fiscal year 2014. Approximately800,000 federal employees were indefinitelyfurloughed, and another 1.3 million were required toreport to work without known payment dates. Only

    those employees and services deemed "excepted"under the Anti-deficiency Act continued governmentoperations. The most recent previous U.S. federalgovernment shutdown was in 199596. The 16-dayduration of the October 2013 shutdown was the third-longest government shutdown in U.S. history

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    A "funding gap" was created when the twochambers of Congress failed to agree to anappropriations continuing resolution. The

    Republican-led House of Representatives, in partpressured and offered several continuingresolutions delaying or defunding the PatientProtection and Affordable Care Act (commonly

    known as "Obamacare"). The Democratic-ledSenate passed several amended continuingresolutions for maintaining funding at current

    sequester levels with no additional conditions.Political fights over this and other issues betweenthe House on one side and President Barack Obamaand the Senate on the other led to the US

    Shutdown.

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    Timeline of events October 1, 2013 (2013-10-01)Government shuts down

    October 2, 2013 (2013-10-02)Obama meets with Republican andDemocratic leaders, but no agreement is reached. House begins passing"mini" appropriations bills. Senate Majority Leader refuses to bring "mini"bills to vote

    October 9, 2013 (2013-10-09)President Obama invites the entireCongress to meet with him about the government shutdown and upcomingdebt ceiling. Separate meetings for House Democrats, House Republicans,Senate Democrats, and Senate Republicans were suggested. The Houseleadership responded that they would send 18 members to meet withObama.

    October 16, 2013 (2013-10-16)Congress plans last-minute votes to avert

    default. The plan would allow the U.S to continue borrowing until February7. House of Representatives Speaker John Boehner said he would allow thedeeply divided House to vote on the Senate plan to move the debt limit anda government reopening. The Senate passed the bill by a vote of 81 to 18. Itpassed in the House a few hours later, 285 for and 144 against. PresidentObama signed the bill into law at 12:30am on October 17, effectively ending

    the shutdown and debt ceiling crisis.

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    2 MAIN PEOPLE INVOLVED

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    We view the on-going political stand-off leading to

    the US government shutdown more as a false alarm

    rather than anything else as indicated by theevolution of the S&P 500 in the below graph from

    CITI's recent Global Macro Strategy note from the

    3rd of October entitled: "Complacency justified?"

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    Effects of Shutdown on ROW

    Following are the federal government agencies thatwere affected by the shutdown-

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    1. Department of Commerce

    2. Department of Defense

    3. Military Academies4. Department of Education

    5. Department of Energy

    6. Department of Health and Human Services7. Centers for Disease Control and Prevention

    8. Food and Drug Administration(FDA)

    9. Department of Homeland Security

    10.NASA

    11.The White House and others as well

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    Effect on Businesses

    Defense contractors and some manufacturers has experienced

    disruptions as the shutdown prevented those companies from

    delivering goods and receiving payments for work already done.United Technologies announced that if the shutdown was not

    resolved by October 7, it would furlough 2,000 employees at a

    military helicopter manufacturing subsidiary, Sikorsky Aircraft.

    Lockheed Martin announced plans to furlough 3,000 employees onOctober 7.

    Small businesses are facing delays in receiving loans from the Small

    Business Administration. Many of these companies may need to turn

    to alternative funding sources that charge much higher interest rates.

    One alternative source of credit, merchant cash advances, charge

    interest rates of between 40% and 100%.

    Similarly, Airbus was unable to deliver new airplanes to the airlines

    JetBlue and US Airways because Federal Aviation Administration

    personnel who certify airplanes were furloughed

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    DEBT CEILING

    On October 11, Senator Susan Collins (R-ME)

    developed a proposal to lift the debt ceiling

    and end the shutdown. Democrats in the

    Senate rejected this proposal because it wouldhave locked sequestration budget cuts into

    law for the next six months. Democratic

    senators wanted to negotiate an end tosequestration before then

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    Analysts were concerned that the political gridlock would

    extend into mid-October, when Congress and the

    President must agree to raise the debt ceiling to avoid

    the prospect of defaulting on the public debt. Following

    the debate over the debt ceiling in May 2013, the

    Treasury Department was forced to engage inextraordinary measures to fund the government. In

    August 2013, the Treasury informed Congress that the

    extraordinary measures would be insufficient starting in

    mid-October and further specified, in late September,that the U.S. would begin to default on its debts if a new

    debt ceiling was not approved by October 17.

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    On October 2, President Obama explicitly linked the government

    shutdown to the debt ceiling issue, stating that he would not

    reopen budget negotiations until Republicans agreed to passageof a bill raising the debt limit.

    On October 7, the Moody's bond credit rating agency released a

    memo stating that it was unlikely the U.S. would risk a default on

    its public debt, and that the nation instead "would continue to

    pay interest and principal on its debt". The memo further stated

    that the financial situation was more serious in 2011 than the

    2013 problem. However, such prioritizing of debt payments over

    all other needs would require that the government default on

    many other payment obligations, likely including a wide array ofbusiness contracts, employee salaries, social insurance benefits,

    and other programs. The Council on Foreign Relations said that

    among the payments implicated were military wages, Medicare

    and Social Security payments, and unemployment support.

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    Potential effects

    Yalman Onaran of Bloomberg News wrote that the government'sfailure to raise the debt ceiling and pay its debt would "halt a $5 trillionlending mechanism for investors who rely on Treasuries, blow upborrowing costs for billions of people and companies, ravage the dollarand throw the U.S. and world economies into a recession that probablywould become a depression", noting that a government default would

    be 23 times larger than the Lehman Brothers bankruptcy during theGreat Recession. On October 15, 2013, Fitch, the credit rating agency,placed the U.S. AAA ratings on "rating watch negative" as talks toincrease the debt limit reached an impasse fueling concerns ofcongressional dysfunction and impending default.

    Japanese Finance Minister Taro Aso said that the debt limit would have

    an "internationally significant impact". On how the US situation couldaffect Japan, he said "I think this could likely result in a situation wherethe dollar will be sold and the yen will be bought." The falling dollar isbad news for Japan's exporters, a key driver of growth in the world'sthird-largest economy, because it erodes their repatriated profits.

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    Global Effect of Shutdown

    United Kingdom Prime Minister David Cameron stated the USA

    shutdown should serve as a reminder on how public expenditureshould be prudently controlled; otherwise, a deficit is inevitable

    People's Republic of China An editorial in the state-run Xinhua

    news service, the official press agency of the country, said The United

    States ,the worlds sole superpower is bearing the consequences ofengaging in irresponsible spending for years. It also called it a

    "bizarre" development and warned that the damage will multiply "if

    the drama drags on.

    Asia Pacific- On October 4, the White House announced thatPresident Obama's upcoming trip to Brunei, Malaysia, the Philippines,

    and Indonesia, where he was scheduled to attend the 2013 Asia-

    Pacific Economic Cooperation meeting in Bali, would be cancelled

    due to the government shutdown

    E O O b 4 U S T d R i Mi h l

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    Europe- On October 4, U.S. Trade Representative Michael

    Froman announced that a scheduled meeting with

    European Union diplomats regarding the proposed Trans

    Atlantic Free Trade Area (TAFTA) would be postponed asU.S. officials could not travel to Brussels.

    Japan- Finance Minister said I think this could likely result

    in a situation where the dollar will be sold and yen will be

    bought but falling dollar is a bad news for Japans

    exporters.

    Russia- Regarding the cancellation of meeting between

    Obama and Putin ,the press secretary of Putin said there isa severe need of continued dialogue on issues like [Syria

    and Edward Snowden].

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    Economic Effect of Shutdown

    In this section of the presentation we will try to look at all those

    adverse effects that the economy faced due to Shutdown and theseare as follows-

    Moody's Analyticsestimated that a shutdown of three to fourweeks would cost the economy about $55 billion. Lost wages ofFederal employees will amount to about $1 billion a week.

    Goldman Sachs estimated that a three-week shutdown wouldreduce the Gross Domestic Product of the United States by 0.9%.

    According to the Los Angeles Times, a two-week shutdown wouldreduce GDP growth in the fourth quarter by 0.3 to 0.4 percentage

    points. By comparison, the GDP has grown by less than 2% in 2013 The negative economic effect of the shutdown will be particularly

    severe in the Washington D.C. metropolitan area. Approximately700,000 D.C. area jobs could be affected at a cost of $200 million aday

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    The State of Maryland predicted that it would lose approximately

    $5 million a day in tax revenue. A press release from the National Park Servicesaid the shutdown

    of national parks would result in losses of $76 million a day intourism-related sales among local communities, but during the

    government shutdown the National Park Service website was

    unavailable.

    During the month of October, tourists spend about $2.7 million aday at the Grand Canyon National Park and other National Parks in

    Arizona.

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    N l t l k t h th t k k t i d i

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    Now, lets look at how the stock market was moving during

    the shutdown period-

    On 7thOctober , the Dow Jones Industrial Average fell below the

    level of 15000 to end at 14936.Similar situation was prevailing inother stock exchanges of US like- NYSE etc and not only US but the

    share markets around the world were affected by this shutdown . Like

    in India the key driving sector of the economy i.e. IT Sector was

    experiencing a downfall everyday with major companies like TCS ,

    Infosys and Mahindra Satyam making new lows in every intraday

    trade session.

    Similarly many other businesses were either directly or indirectly

    affected this event and were experiencing heavy losses because of

    this 16 day long shutdown , especially those businesses that were

    connected with federal organisations.


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