World markets down moderately on threats of U.S. debt default
Markets in Asia and Europe are down moderately on Wednesday reflecting the skittishness being caused by the U.S. debt talks. Dow futures were flat at 12,434. The dollar continues to weaken against other currencies and oil remains at $99 per barrel. It was reported by Bloomberg that the yield on 10-year Treasuries was 2 basis points higher in Japan today.
Moody's downgrade inevitable?
Moody's has indicated that the U.S. government's credit rating will be OK if it avoids default, according to the Associated Press. Standard and Poor's, however, has indicated that unless the debt agreement cuts $4 trillion it will downgrade the U.S. debt to Aa from Aaa within 90 days. A lower credit rating will result in higher borrowing costs for the U.S. resulting in about $100 billion more of payments to those who hold U.S. debt. The trickle down effect will make it harder for consumers to borrow and result in higher interest rates on mortgages, student loans and corporate debt. Mortgage loans would move from the current 4.5% to about 5.1%. Corporations will see an increase in their borrowing costs as well, causing them to retain cash and not invest in hiring or new initiatives.
Money market funds stockpiling cash
According to the Financial Times, U.S. money market funds are beginning to stockpile cash, disrupting short term markets and increasing the borrowing cost for banks, especially on their overnight loans. This is occurring as the U.S. House of Representatives has returned to its Chambers to examine the $1.3 trillion of savings currently within the proposed legislation. The CBO indicated that the real savings was less over 10 years than anticipated. Experts predict that U.S. money market funds will successfully survive a debt crisis because even with a lowered credit rating it is still the safest debt in the world.
FAA remains shut down
Legislation to re-open the Federal Aviation Administration remains stuck in Congress with little hope for compromise in the near future, as reported by the Associated Press. The Republicans want to cut air service subsidies and make it more difficult for aviation employees to unionize while, of course, the Democrats feel otherwise. Republicans are looking to cut $16.5 million from the FAA's $16 billion budget. The shut down has resulted in the furlough of 4,000 workers and has stopped $2.5 billion of airport construction projects. It is believed that the 150 projects forced to have been stopped is resulting in lay-offs in the private sector. This legislation is separate from the debt ceiling debate. Additionally, the taxes collected on airfares have been incorporated into ticket prices by the airlines and will probably result in higher fares in the future when the FAA is back in business.
US Post Office shutting offices
The United States Post Office will be closing 3700 post offices in the future and, in many cases, opening service centers in general store or express store environments. The closures will save $200 million annually. It is anticipated that 4500 jobs will be eliminated. According to the Washington Post, the USPS will suffer $8 billion of losses this year alone, due to increased usage of electronic mail as well as business usage of firms like Federal Express. Additionally, it owes $3 billion annually to support retiree health care.