Global Banking Industry Will Have Wider Implication on Account of the US Debt Ceiling Issue

In the last week the U.S House has voted to temporarily suspend the nation’s borrowing limit. This action will result in lifting the US debt limit until 19th May 2013 and will accommodate US treasury borrowing up to this time. The approval of Senate and the President is required which is expected to happen. This move will give time for the government time to keep paying its bills while Congress and the White House work out a deal to reduce the deficit however it will not halt upcoming spending cuts or impending clashes over government spending. Investors will look forward to the next face-off between the Republicans and the US president in the first week of March 2013 in relation to the spending cuts and a possible shutdown by end of March 2013. The US is having a huge debt problem which should be resolved.

They also need to take the budget under control. Lack of resolution and continued deferment of fiscal issues can result in another Sovereign downgrade and send the bond yields high. It can also give a shock to the capital markets and weaken the dollar initially. However the collapse in global capital markets and commodities can shift funds movement to US treasuries resulting in strengthening of US dollar.

The US fiscal woes are one of the greatest threats to global economy apart from the euro crisis. It can discourage long term investors both in the regional and global financial markets. Earlier the U.S government reached its $16.4tn limit on 31 December 2012.A debate in 2011over the debt ceiling limit resulted in US losing its sovereign downgrade and temporary shock in the financial markets. Since Standard & Poor’s downgraded U.S. debt in August 2011, the 10-year yield has fallen and is now below 2 percent. In Jan 2013 Fitch had given warning of US downgrade over debt ceiling concerns. It had warned that absence of a credible medium term deficit reduction plan would result in a downgrade later this year even if another debt ceiling crisis is averted.

GCC economies fiscal budgets currently are based on an oil price at a minimum of $60/ Barrel. Presently as the oil prices are at high levels it has given opportunity for GCC to build the current account surplus and fiscal surplus. Collapse of oil price from current high levels due to US debt ceiling issue can be withstood by GCC economies if the shocks in financial markets don’t prevail for a long time. However GCC capital markets are sensitive to both the oil price and developments in US. A massive correction in capital markets can deprive the banking players of earnings through the investments. The GCC bond yields also rise to US Sovereign Concerns and can impact the bond book. The liquidity in the interbank money market can also get dried up resulting in rise in yields and strain in the financial system. Currently the low interest margins puts pressure on GCC Banking sector profitability that are looking for other sources of income namely investment and forex income to improve their bottom-line. Collapse of financial markets will deprive the Banking sector of these sources of income. If no resolution is arrived in relation to US fiscal cliff and if the drying of liquidity in financial markets and panic situation prevails it can impact the growth of GCC economies and the performance of GCC Banks. This is also applicable for global banks as well and hence Global Banking industry will have wider implications on account of US debt ceiling issue.