U.K. Prime Minister David Cameron underscored the dangers stemming from the first partial U.S. government shutdown in 17 years as Pentagon chief Chuck Hagel told allies the U.S. would fulfill its overseas duties.
“It is a risk to the world economy if the U.S. can’t properly sort out its spending plans,” Cameron told BBC Radio 4’s “Today” program in Manchester, where his Conservative Party is holding its annual conference.
As many as 800,000 U.S. federal employees have been idled, national parks closed and some services halted after Congress failed to break a partisan deadlock before a midnight deadline. Congressional leaders have scheduled no further negotiations, raising concerns among some lawmakers that the shutdown could bleed into the fight over how to raise the U.S. debt limit to avoid a first-ever default after Oct. 17.
A shutdown that lasts at least a month could knock 1 to 2 percentage points off of fourth-quarter GDP growth in the world’s largest economy, said Robert Prior-Wandesforde, a Singapore-based economist at Credit Suisse Group AG. “Given how high the stakes are, as we’ve seen a couple of times in the recent past, it will be resolved, or at least the can will be kicked down the road once more,” he said.
A one-week shutdown of some government services should have a less-than 0.1 percent impact on U.S. gross domestic product, said Tomo Kinoshita, chief economist at Nomura Holdings Inc. in Tokyo.
The MSCI World Index of developed nations’ stocks rose 0.2 percent at 11:35 a.m. in London, illustrating how that “the market is not panicked about this,” Alexander Friedman, chief investment officer at UBS AG’s wealth-management unit.
The shutdown “sets up the political wrangling to take place now as opposed to in two weeks, making a debt default less likely,” Friedman, told Anna Edwards and Mark Barton on Bloomberg Television in London. “Between now and Oct. 17 is more of a buying opportunity. We haven’t reached any inflection point where investors should give up confidence.”
Cameron said the shutdown was a warning to other countries. It’s “a reminder to all of us that we need to have properly planned public-expenditure systems, properly planned tax, properly planned arrangements for getting our deficit down,” Cameron told Sky News television today. “Some people want to get away from the subject of deficit reduction and sorting our economy out and turning it around, but I think we will have lots of reminders over the coming months, like what’s happening in America, that it’s absolutely vital.”
Concern in Asia
Asian policy makers signaled they are bracing for increased volatility. Officials in South Korea and the Philippines said they were prepared to take steps to stabilize financial markets if needed.
They highlighted the importance of a quick resolution, with South Korea and Sri Lanka warning that a prolonged shutdown would hurt their economies. The risk of the U.S. defaulting on its debt due to the political stalemate is more worrisome as it would lead to unprecedented chaos in global markets, Philippine Finance Secretary Cesar Purisima said.
The Pentagon’s lawyers are reviewing how many of the military’s roughly 400,000 civilians employees expected to be furloughed -- or about half the civilian workforce -- can be considered “exempt” from shutdown provisions and stay on the job, Hagel, the U.S. defense secretary, said today in Seoul.
“We will fulfill our mission of maintaining the alliances we have,” Hagel said. “But it does cast a very significant pall over America’s credibility with our allies.” The shutdown “is nonsensical,” and “completely irresponsible,” he said. “It’s needless. It didn’t have to happen.”
© Copyright 2014 Bloomberg News. All rights reserved.