The document discusses the potential impacts of the ongoing US political deadlock over the budget and debt ceiling. It notes that while a government shutdown will likely only reduce US GDP growth slightly and temporarily, failure to raise the debt ceiling could be catastrophic and lead to US default. This could cause a loss of confidence in the US dollar as a reserve currency. However, the analyst expects Congress will approve a new budget and raise the debt ceiling to avoid such consequences in the short-term. Nevertheless, continued political uncertainty may still damage confidence and the credibility of the US dollar in the long-run.

1. Weekly Commentary
QNB Economics
economics@qnb.com.qa
October 13, 2013
Disclaimer and Copyright Notice: QNB Group accepts no liability whatsoever for any direct or indirect losses arising from use of this report.
Where an opinion is expressed, unless otherwise provided, it is that of the analyst or author only. Any investment decision should depend on the individual
circumstances of the investor and be based on specifically engaged investment advice. The report is distributed on a complimentary basis. It may not be
reproduced in whole or in part without permission from QNB Group.
Political Deadlock Could Impact the Credibility of the US
Dollar, According to QNB Group
The current political deadlock over the US
budget and debt ceiling could impact the
credibility of the US dollar, according to QNB
Group. The US administration began a partial
government shutdown after Congress failed to
agree on a new budget by October 1, 2013. As a
result, more than 800,000 non-essential federal
employees (out of 2.1m) are facing unpaid leave.
In addition, the deadline of October 17, 2013 to
increase the US debt ceiling in order to avoid an
unprecedented default on US government debt
is fast approaching. According to QNB Group,
the likelihood that this political deadlock
continues past the October 17 deadline is small,
given its catastrophic implications for the US
and the world economy. However, the
credibility of the US dollar as the world reserve
currency could be tarnished.
The political deadlock over the US budget is
likely to have a small and temporary effect on
US economic growth. The lack of a political
compromise over the US budget has meant that
the corresponding appropriations for various
government services were not approved by
October 1, the start of the new fiscal year. Once
Congress fails to appropriate funds, the US
government has to shutdown (with the
exception of essential services) as it is unable to
pay for its employees or goods and services.
Government shutdowns are disruptive but not
uncommon in the US, as they have been used in
the past to force either political party to concede
on key policy measures. The last US
government shutdown occurred in 1996, when
the Republican-led Congress unsuccessfully
sought to force President Clinton to cut
Medicare, education, and environmental
programs. The economic impact of a
government shutdown is estimated to be small
(in the range of 0.1%-0.3% of GDP) and likely to
be temporary as the eventual approval of the
budget will restore all the functions of the US
government.
The political deadlock over the US debt ceiling is
different and significantly more dangerous.
Congress has placed a ceiling on how much debt
the Treasury can issue since 1917 in order to
impart fiscal discipline. These ceilings need to
be increased by law each time US government
debt approaches the ceiling in order to avoid
default. The US Treasury reached the current
debt ceiling of USD16.7 trillion on May 19, 2013
(see chart). Since then it has temporarily cut its
borrowing from various internal accounts, using
the resulting room to keep issuing US Treasury
bonds and bills. However, the US Treasury has
warned that it will have to default on US
government debt unless Congress raises the
ceiling by October 17 2013.

2. Weekly Commentary
QNB Economics
economics@qnb.com.qa
October 13, 2013
US Gross Federal Debt and Debt Ceiling
(Trillion of USD)
0
2
4
6
8
10
12
14
16
18
2012
2013f
1995
1996
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1994
Gross Federal Debt
USDebt Ceiling
Sources: www.whitehouse.gov and QNB Group analysis
A default on US government debt would be
catastrophic for the US and world economy.
Ratings agencies would automatically need to
classify all US government debt in default. This
would force institutional investors around the
world, including central banks, to sell their
holdings of US government bonds, as they have
statutory requirements to hold only
investment-grade assets. The US government
would then no longer be able to rollover a large
portion of its debt, let alone issue new ones. For
the US economy, the lack of debt instruments to
finance government spending would mean
reneging on its other obligations, including
Social Security, medical payments, military
deployments and food stamps. A large portion
of the US economy would therefore grind to a
halt. For the world economy, it would imply a
loss of the reserve currency that anchors the
global financial system, with severe instability
in exchange and bond markets. This would
inevitably result in a sharp global recession.
In light of these catastrophic consequences,
QNB Group expects that Congress will pass a
new budget and increase the debt ceiling in the
coming days. Nevertheless, the political
deadlock over the last couple of weeks has
created an atmosphere of uncertainty that could
affect confidence, investment and growth in the
US. More importantly, the credibility of the US
dollar as the world’s reserve currency could be
affected, as global investors seek to mitigate the
risk of a future political deadlock. Overall,
without political collective commitment, it is
unlikely that the US dollar will continue to
remain the world’s reserve currency.