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October 30, 2013

Last-Minute Agreement Ends Government Shutdown, Suspends Debt Ceiling

After a 16-day federal government shutdown and gridlock over whether to   raise the nation’s debt ceiling, a last-minute agreement brought a temporary   end to the impasse. The measure, formally known as the “Continuing   Appropriations Act, 2014,” was passed by both houses of Congress and   signed by President Obama shortly after midnight on October 17–the day on   which the Treasury had said it would begin running out of cash to pay the   nation’s bills.

What does the agreement do?

The legislation suspends the debt ceiling until February 7 and provides   sufficient funding to reopen the government for the next three months   (through January 15). It applies retroactively through October 1, the day on   which the federal government was forced to begin furloughing roughly 800,000   employees.

To try to address longer-term issues, the agreement also establishes a   congressional budget conference that would issue a report no later than   December 13. That will be run by Sen. Patty Murray (D-Washington) and Rep.   Paul Ryan (R-Wisconsin), who head their respective chambers’ budget   committees. The across-the-board budget cuts known as the sequester, which   were adopted as part of the agreement that ended the 2011 debt ceiling and   were implemented earlier this year, remain in effect. The new agreement also   requires income verification for people receiving subsidies under the   Affordable Care Act, and if the debt ceiling is reached again in February,   the Treasury will not be prohibited from using measures like those it has   been using since May to cope with the current debt ceiling.

What exactly is the debt ceiling?

The debt ceiling represents a limit on the amount the Treasury is allowed   to borrow to manage the national debt (the total amount currently owed by the   U.S. government). An increase in the debt limit does not authorize additional   government spending, which only Congress can approve; it enables the Treasury   to help manage its cash flow and pay bills that have already been incurred.

Technically, hitting the debt ceiling is not the same as defaulting on   payments. In fact, the Treasury actually hit the debt ceiling in May, and has   been using various accounting measures since then to temporarily extend its   ability to borrow. That created greater uncertainty about whether hitting the   debt ceiling on October 17 would have prevented the country from meeting its   financial obligations. That was a special concern not only for recipients of   Social Security and Medicare benefits but also for investors. Because   Treasuries have traditionally been seen as the safest sovereign debt in the   world, overseas investors hold a substantial amount of it. The uncertainty   helped underscore fears not only of a default, but that some countries might   increase calls for alternatives to the U.S. dollar as the global reserve   currency.

How will the agreement affect financial markets?

Investors’ immediate reaction to the news was extremely positive. Word on   Thursday that a deal had been reached sent the S&P 500 up 1.4% and added   206 points to the Dow Jones Industrial Average in a single day. Even if that   enthusiasm fades as equities once again start to respond to other influences,   it was a far cry from the reaction to the 2011 extension of the debt ceiling,   which was followed by a 10.6% decline in the S&P over the week following   the August 2 signing. But investors now must turn their attention once again   to corporate earnings season and the question of whether the shutdown’s   economic impact will affect when the Federal Reserve starts to taper its   economic support.

The new agreement also helps protect the nation’s credit rating from a   threatened downgrade that would have affected borrowing costs. Yields on   1-month Treasury bills, which had soared in October when several   institutional investors began unloading them as the debt ceiling deadline   neared, were cut in half overnight after the announcement.*

When will government agencies return to fully functional status?

The roughly 800,000 federal employees furloughed during the shutdown were   instructed by the Office of Management and Budget to be ready to return to   work the day after the agreement was signed. However, individual agencies may   vary depending on the method each uses to notify employees, who will be   entitled to receive back pay for the shutdown period.

What was the economic impact of the shutdown?

Standard & Poor’s estimated that as of the day before the agreement,   the shutdown had cost the U.S. economy $24 billion, cutting roughly 0.6% from   inflation-adjusted Q4 gross domestic product.** (S&P also estimated that   had there been a default, the result would have put the economy into   recession.)

*Source: U.S. Treasury Resource Center ( Daily Treasury Yield   Curve Rates as of 10/17/2013.

**Source: Standard & Poor’s press release, October 16, 2013.