The Distillery: Default deal perks

Jotters consider the potential for US default, but one says markets will bounce and the Australian dollar will fall when a deal is inevitably reached.

It’s almost a week after the US government shutdown began and business commentators are taking time to reflect on its broader implications. The most obvious consideration is the potential for default in coming weeks, which jotters say would have brutal consequences. One scribe, however, looks closely at the repercussions closer to home and explains why our exporters will be far from amused with last week’s developments.

Elsewhere, the Leighton Holdings scandal continues to drum up interest, questions are asked about a ceiling for our sharemarket and the infrastructure plans of Tony Abbott are in the spotlight.

But it’s the US where most attention centres, and Fairfax’s Malcolm Maiden assesses the process that could lead from shutdown to catastrophic default. If the US debt ceiling is not lifted by October 17 then around mid-November the government will be unable to cover the interest on a tranche of debt – and then the trouble would really start.

“Distinctions between a so-called ‘technical’ default and a real default would at that point become meaningless as news that the world's most important debt issuer had failed to cover its obligations sent shockwaves around the world. There would probably be massive forced selling as the default triggered bond fund mandates that specify that only top-rated, untainted securities can be owned. There would certainly be panic selling, on the shock of a default by the government considered safest of all in times of crisis.”

However given most people actually expect a deal to be done in time, The Herald Sun’s Terry McCrann outlines the kind of events we can expect in light of the grandstanding.

“Obviously the closer we get to the dreaded day, and there's no solution to the shutdown, the greater the fear and loathing, the more volatile markets are likely to be. And then, when as is likely, a deal will be done, there will be relief rallies everywhere. Wall Street would likely leap, along with the US dollar. Our dollar would drop, but probably stay above 90 US cents. The single biggest consequence of all this will be the all but certain postponement of the 'taper’.”

The Russian roulette though has already had an impact on clarity for markets, according to The Australian’s Adam Creighton, who says a default would risk a crisis worse than the last.

“Economists everywhere were desolate on Friday. The US Department of Labor failed to update the country's unemployment rate, one of the biggest pieces in the world's economic jigsaw puzzle, something it normally does on the first Friday of the month. The department's operations are collateral damage in an internecine political war in Washington, D. C. over the size and scope of the US government; a war that risks plunging the world into recession and prompting a financial crisis that could dwarf the last.”

Did no one think about the economists? Not delivering key statistics to this cross-section of society is like taking away a calculator from an accountant, or hiding a bone from a puppy. It’s just cruel.

The Australian Financial Review’s David Bassanese, meanwhile, analyses the impact of the US posturing in Australia and discovers a reason for exporters to feel aggrieved.

“In a cruel twist of fate, just when Australian exporters were starting to relish the prospect of a lower and more competitive Australian dollar, the budget squabbles in Washington have pushed the local currency back up again … So far at least, it’s only been the impact of US budget squabbles on the Fed that has boosted the Australian dollar – thankfully, fears over the US economy have held up reasonably well … What’s more, the Australian dollar – at least at current levels – is far less overvalued than it used to be.”

Bassanese’s colleague at the AFR, economics editor Alan Mitchell, also touches on the currency problem. The question he asks is: will our dollar keep rising?

“For Australia, the clearest risk of the current impasse in Washington is that is that it will undermine growth in the US and global economies. However, the potential impact of a US default on capital flows and the Australian dollar is more difficult to predict. A general increase in risk aversion, and US investors’ urgent need for cash, might see heavy selling of the Australian currency, but a US recession and Australia’s reputation as a safe haven could be pushing the Australian dollar in the opposite direction.”

Moving to Australian news, and the Leighton Holdings and Reserve Bank of Australia scandals continue to be the subject of plenty of discussion, particularly with regard to regulators.

The Australian’s John Durie speaks of the role of the Australian Federal Police in relation to the Leighton bribery saga, while Terry McCrann, also in The Australian, mulls the challenges from separating fact from fiction in the Reserve Bank case. And what role does the Australian Securities and Investments Commission play in all this?

Elsewhere, Fairfax’s Michal Pascoe finds a French solution that incumbent Australian retailers like Harvey Norman could embrace, The Australian’s Judith Sloan spots a problem with Tony Abbott’s plan to be the infrastructure prime minister and Fairfax’s economics editor Ross Gittins explores the social dimensions of modern economics.

Finally, the AFR’s David Bassanese discusses why the good run of the Australian sharemarket in recent months may have run out of gas.

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