Tags: Greenhaus | nervousness | fright | debt

BTIG's Greenhaus: 'Nervousness Will Have to Give Way to Fright' If Shutdown Lasts, Debt Ceiling Approaches

By Michael Kling   |   Thursday, 03 Oct 2013 11:57 AM

Nervousness in the markets will have to give way to fright if the government shutdown continues and we start running up to the debt ceiling, warns Dan Greenhaus, chief global strategist for the New York brokerage firm BTIG.

The situation in Washington is worse than initially thought, Greenhaus told clients, The Huffington Post reports. http://www.huffingtonpost.com/2013/10/02/stocks-government-shutdow_n_4029689.html

"The probability that the government goes right up to the wire on the debt ceiling, thus causing some destabilization in equity markets, is higher than we previously thought," he stated.

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"We had said we were starting to get nervous," Greenhaus added. "If this continues, nervousness will have to give way to fright."

No resolution to the budget standoff seems to be in sight. Republicans controlling the House say they won't approve a budget or raise the debt ceiling unless Obamacare is defunded or delayed. President Obama and the Democratic-controlled Senate refuse to touch the healthcare law, saying they won't be blackmailed.

The Treasury Department expects to reach the debt limit on Oct. 17. When it does, it won't be able to borrow more to pay for previously approved spending. That could prompt a government defaults that roils financial markets, a prospect that would be much more damaging than the government shutdown is.

If Treasury bond investors fear the government won't be repay them, they may demand higher rates, causing government borrowing costs, as well as interest rates for business and consumer loans, to jump.

"We believe this is very much a negative-sum game: the odds of a major shock to the economy and a full-blown correction to the stock market have risen," Ethan Harris, global economist at Bank of America Merrill Lynch told clients, according to The Huffington Post.

If Congress does not raise the debt limit, spending would have to be cut by about a third, according to The Washington Post. http://www.washingtonpost.com/business/economy/danger-to-economy-worries-experts-weighing-potential-government-shutdown-default/2013/09/29/651b7e5c-2793-11e3-ad0d-b7c8d2a594b9_story.html Social Security checks, military pay and payments to doctors would possibly be delayed.

Economists, The Post notes, estimate that an extended shutdown may cut economic growth in the fourth quarter by up to 1.4 percentage points, reducing growth to almost a standstill.

"That would mean a hit to employment and income as we approach the critical holiday season," writes Diane Swonk of Mesirow Financial http://www.mesirowfinancial.com/blog/economics/2013/09/20/dswonk/fiscal-fiasco-looms/ in a recent report.

"The economy has already decelerated from a 2.5 percent pace in the second quarter of this year to an estimated 1.8 percent pace in the third quarter," she states. "Do we want to risk stall speed again in the fourth quarter just because our elected officials can’t bring themselves to negotiate on our behalf? Incompetence is a cost that cumulates over time."

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