Too Big to Fail

Ever been tempted by banks offering to raise your credit card limit because of your frequent usage? It gives you the illusion that you have higher buying power and spending limit.

... until one day your business takes a downturn or you get hit by the dreaded layoff. Suddenly, you find yourself stuck with the debts that just won't go away, and piling up interest payments awaits.

And what's worse? Sometimes, in a moment of desperation, you beg the bank to increase your credit limit once again, even though deep down you know your income is going down the drain. You're confident things will turn around financially, right?

But guess what? That's when the trouble starts. Your debts keep climbing while your income keeps free falling.

Until, finally, the bank wakes up from their slumber and decides they've had enough. They refuse to grant you any more credit limit increases. It’s time to pay up!

We're witnessing a familiar cycle, but on a grander stage: the United States.

However, let's face it, we're dealing with the largest world economy here. The potential consequences are simply too dire and colossal to afford any possibility of failure.

Source: BBC

The US debt ceiling, a perennial source of political drama and market anxiety, is once again taking center stage. As lawmakers engage in this biennial high-stakes fiscal tightrope act, let's dive into the economic implications of this financial spectacle.

The deal to rise America’s debt ceiling to $31.4tn has been passed by the congress last Thursday. The government can resume borrowing money to pay its bill and avoid default. The last minute agreement suspended the debt ceiling, flattens some categories for two years until the next 2024 election.

Does this mean problem solved? Crisis averted?

The fact still stands that, federal debt held by investors at home and abroad has reached up to 93% of GDP now, triple the level on the eve of global financial crisis in 2007-2009. America’s fiscal path is still progressing in a worrisome trajectory- which has not been altered by this deal.

Throughout the years, the United States has engaged in strenuous discussions regarding the increase of its debt ceiling. However, when push comes to shove, the bank or the Fed has always succumbed to the rescue. Their weapon of choice? Printing more money.

Up to a point where $1 tn coin came to discussion during the US debt-ceiling crisis of 2011 as a proposed way to bypass any necessity for the Congress to raise the country's borrowing limit.

Bank of America foresees higher U.S. government borrowing potentially causing an interest rate hike of at least 0.25% in funding markets.

Although it may lead to a temporary crowding-out effect and push an increase in U.S. and Indonesia bond yields, our lead Economist, Mike, is optimistic that again The Fed will come to the rescue and inject liquidity in the market by buying off the treasury bills in the secondary market or cutting interest rate even more. At the cost of inflation to save economic growth.

Source: Sucor Sekuritas

It will take all necessary measures as it aims to curb a deep recession, and avert further troubles for mid to low-size banks. In the process, it will also benefits global equity markets with the money circulated.

Emerging market such as Indonesia whose economic is at its best forms, benefits from the market stability achieved from this deal.

Furthermore, as stated in Mike's report, Indonesia's bond market is expected to remain resilient, supported by trade surplus liquidity and the spillover effect of positive US economy growth. Our target remains unchanged: 6.0% for Indonesia's 10-year bond by year.

Therefore, I guess it's safe to say with the signed debt ceiling bill, it is Risk OFF-for now. Until for the next expected lengthy negotiation in 2024 when debt ceiling is brought back into the discussion muddled with the upcoming election political drama.

It is also important to note that, the US debt ceiling represents a critical issue with profound implications for financial markets. While the US has a long history of raising the debt ceiling, to assume that things will always stay the same down the road, is complacent.