Financial markets have, for now, largely shrugged off the noise surrounding the increase in the debt ceiling in the US.
US equities have rallied to a nine-month high and credit default swaps are indicating a roughly 4 per cent probability of a US debt default over the next year. That could change quite quickly as we near the “x-date” – the date at which the Treasury runs out of money to pay its bills, which Treasury Secretary Janet Yellen indicated could happen on June 1.
The US Treasury already hit its debt ceiling of $31.4 trillion in January, which means it is no longer able to issue new debt to finance budget shortfalls. Instead, the Treasury has been relying on cash in its accounts at the Federal Reserve, and “extraordinary measures” — effectively accounting entries — to meet its obligations.
The x-date is not fixed in stone, as the Treasury is still collecting tax revenue and may be able to get through the first week of June before it runs out of funds, but there is not much time left for congress to agree on a deal and pass the required legislation to prevent the US defaulting.
While all parties to the negotiations have indicated that they do not want to get to a point where the US is in default — an unprecedented event were it to occur — an agreement has not been reached as of May 19.
Republicans are calling for significant cuts to spending and some regulatory changes, while Democrats and the White House want an increase to the debt ceiling without any conditions, as the spending has already been approved by Congress in the last budget.
Clearly, the market expects an agreement to be reached before the US goes into default, but brinkmanship and delays could yet cause stress in the markets and have a negative impact on economic activity as borrowing costs could rise and businesses delay investment due to the high levels of uncertainty.
The last time the US came close to a default was in August 2011 during the Obama administration. The S&P 500 fell by 6 per cent in the fortnight prior to the debt ceiling being raised, as political wrangling continued until the very last minute.
Crucially, equities declined a further 13 per cent even after the necessary legislation was passed, and only started to recover in October 2011.
Rating agency Standard & Poor's downgraded the US’s credit rating to AA+ from AAA shortly after the debt ceiling was raised, citing, among other things, uncertainty about debt dynamics. Financing costs rose and private sector confidence declined even though a default was ultimately averted.
Most analysts expect a deal will be reached before the deadline to raise or suspend the debt ceiling.
Even in this baseline scenario, however, growth could be negatively affected in the near-term, with some job losses, if the negotiations go down to the wire. If the final agreement includes spending cuts or caps that come into effect immediately, then this could provide a further drag on economic activity.
However, there is a non-negligible risk that a compromise isn’t reached in time, or that the deal agreed isn’t passed by Congress. It is impossible to know with any certainty what the impact on financial markets and the global economy might be in this scenario, as there is no precedent to look to.
The severity of the shock would also depend on how long the situation lasts. Financial market volatility and the immediate political fallout of the US not being able to pay its bills would probably force all parties to reach an agreement on raising or suspending the debt ceiling before too much damage is done, perhaps within a week or two.
In this scenario, the Treasury would most probably prioritise the repayment of interest on its debt, while cutting back on all other spending including social security, Medicare, other benefit programmes, salaries of all federal employees and payments to contractors and suppliers.
Provided the delays in payments are not prolonged, the negative impact on economic activity and increase in unemployment would probably also be limited, but perhaps more severe than under the baseline scenario.
Khatija Haque is chief economist and head of research at Emirates NBD
JAPANESE GRAND PRIX INFO
Schedule (All times UAE)
First practice: Friday, 5-6.30am
Second practice: Friday, 9-10.30am
Third practice: Saturday, 7-8am
Qualifying: Saturday, 10-11am
Race: Sunday, 9am-midday
Race venue: Suzuka International Racing Course
Circuit Length: 5.807km
Number of Laps: 53
Watch live: beIN Sports HD
Killing of Qassem Suleimani
Killing of Qassem Suleimani
COMPANY%20PROFILE
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Specs
Engine: 51.5kW electric motor
Range: 400km
Power: 134bhp
Torque: 175Nm
Price: From Dh98,800
Available: Now
UAE currency: the story behind the money in your pockets
Types of policy
Term life insurance: this is the cheapest and most-popular form of life cover. You pay a regular monthly premium for a pre-agreed period, typically anything between five and 25 years, or possibly longer. If you die within that time, the policy will pay a cash lump sum, which is typically tax-free even outside the UAE. If you die after the policy ends, you do not get anything in return. There is no cash-in value at any time. Once you stop paying premiums, cover stops.
Whole-of-life insurance: as its name suggests, this type of life cover is designed to run for the rest of your life. You pay regular monthly premiums and in return, get a guaranteed cash lump sum whenever you die. As a result, premiums are typically much higher than one term life insurance, although they do not usually increase with age. In some cases, you have to keep up premiums for as long as you live, although there may be a cut-off period, say, at age 80 but it can go as high as 95. There are penalties if you don’t last the course and you may get a lot less than you paid in.
Critical illness cover: this pays a cash lump sum if you suffer from a serious illness such as cancer, heart disease or stroke. Some policies cover as many as 50 different illnesses, although cancer triggers by far the most claims. The payout is designed to cover major financial responsibilities such as a mortgage or children’s education fees if you fall ill and are unable to work. It is cost effective to combine it with life insurance, with the policy paying out once if you either die or suffer a serious illness.
Income protection: this pays a replacement income if you fall ill and are unable to continue working. On the best policies, this will continue either until you recover, or reach retirement age. Unlike critical illness cover, policies will typically pay out for stress and musculoskeletal problems such as back trouble.
Notable salonnières of the Middle East through history
Al Khasan (Okaz, Saudi Arabia)
Tamadir bint Amr Al Harith, known simply as Al Khasan, was a poet from Najd famed for elegies, earning great renown for the eulogy of her brothers Mu’awiyah and Sakhr, both killed in tribal wars. Although not a salonnière, this prestigious 7th century poet fostered a culture of literary criticism and could be found standing in the souq of Okaz and reciting her poetry, publicly pronouncing her views and inviting others to join in the debate on scholarship. She later converted to Islam.
Maryana Marrash (Aleppo)
A poet and writer, Marrash helped revive the tradition of the salon and was an active part of the Nadha movement, or Arab Renaissance. Born to an established family in Aleppo in Ottoman Syria in 1848, Marrash was educated at missionary schools in Aleppo and Beirut at a time when many women did not receive an education. After touring Europe, she began to host salons where writers played chess and cards, competed in the art of poetry, and discussed literature and politics. An accomplished singer and canon player, music and dancing were a part of these evenings.
Princess Nazil Fadil (Cairo)
Princess Nazil Fadil gathered religious, literary and political elite together at her Cairo palace, although she stopped short of inviting women. The princess, a niece of Khedive Ismail, believed that Egypt’s situation could only be solved through education and she donated her own property to help fund the first modern Egyptian University in Cairo.
Mayy Ziyadah (Cairo)
Ziyadah was the first to entertain both men and women at her Cairo salon, founded in 1913. The writer, poet, public speaker and critic, her writing explored language, religious identity, language, nationalism and hierarchy. Born in Nazareth, Palestine, to a Lebanese father and Palestinian mother, her salon was open to different social classes and earned comparisons with souq of where Al Khansa herself once recited.
The%20Sandman
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Key facilities
- Olympic-size swimming pool with a split bulkhead for multi-use configurations, including water polo and 50m/25m training lanes
- Premier League-standard football pitch
- 400m Olympic running track
- NBA-spec basketball court with auditorium
- 600-seat auditorium
- Spaces for historical and cultural exploration
- An elevated football field that doubles as a helipad
- Specialist robotics and science laboratories
- AR and VR-enabled learning centres
- Disruption Lab and Research Centre for developing entrepreneurial skills
UAE currency: the story behind the money in your pockets
Tearful appearance
Chancellor Rachel Reeves set markets on edge as she appeared visibly distraught in parliament on Wednesday.
Legislative setbacks for the government have blown a new hole in the budgetary calculations at a time when the deficit is stubbornly large and the economy is struggling to grow.
She appeared with Keir Starmer on Thursday and the pair embraced, but he had failed to give her his backing as she cried a day earlier.
A spokesman said her upset demeanour was due to a personal matter.
Founder: Ayman Badawi
Date started: Test product September 2016, paid launch January 2017
Based: Dubai, UAE
Sector: Software
Size: Seven employees
Funding: $170,000 in angel investment
Funders: friends
Sole survivors
- Cecelia Crocker was on board Northwest Airlines Flight 255 in 1987 when it crashed in Detroit, killing 154 people, including her parents and brother. The plane had hit a light pole on take off
- George Lamson Jr, from Minnesota, was on a Galaxy Airlines flight that crashed in Reno in 1985, killing 68 people. His entire seat was launched out of the plane
- Bahia Bakari, then 12, survived when a Yemenia Airways flight crashed near the Comoros in 2009, killing 152. She was found clinging to wreckage after floating in the ocean for 13 hours.
- Jim Polehinke was the co-pilot and sole survivor of a 2006 Comair flight that crashed in Lexington, Kentucky, killing 49.
World Cricket League Division 2
In Windhoek, Namibia - Top two teams qualify for the World Cup Qualifier in Zimbabwe, which starts on March 4.
UAE fixtures
Thursday, February 8 v Kenya; Friday, February 9 v Canada; Sunday, February 11 v Nepal; Monday, February 12 v Oman; Wednesday, February 14 v Namibia; Thursday, February 15 final
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