US debt limit crisis threatens chemicals, other manufacturing

25 July 2011 22:12  [Source: ICIS news]

WASHINGTON (ICIS)--The US debt limit crisis could have serious consequences for domestic chemicals producers and other manufacturers if not quickly resolved, a top industry official said on Monday, and ultimately it could trigger a new recession.

Larry Sloan, president of the Society of Chemical Manufacturers and Affiliates (SOCMA), said that as long as the political logjam over raising the US government’s borrowing authority persists, the greater the threat to the nation’s credit rating and the overall economy.

Republicans and Democrats in Congress along with President Barack Obama have been struggling for weeks to come up with a mutually acceptable plan to raise the limit on the federal government’s authority to borrow money - known as the debt limit or ceiling.

By law, the US Treasury Department may not issue bonds or otherwise borrow money in excess of the debt limit set by Congress. The current debt limit is set at $14,300bn (€10,010bn).

Because the US government’s income from tax revenues and fees covers only about 60% of its daily $10bn in outlays, the Treasury Department must borrow money on international financial markets to cover the balance - some $4bn/day.

But Treasury’s ability to borrow more money - to pay federal programmes and meet other debt payment obligations - is expected to reach the $14,300bn ceiling on or about 2 August.

Even if Republicans and Democrats on Capitol Hill can work out an agreement to increase the debt limit before next Tuesday, the US government’s triple-A credit rating is already seen to be at risk.

“A less than stellar credit rating on our sovereign debt will trickle down to higher interest rates on everything from capital improvement loans to revolving credit,” Sloan said.

As a consequence, chemical companies and other industrial firms that depend on outside funding for capital improvements or major equipment purchases “could feel the brunt”, he said.

“In addition, those firms with investments tied up in the market - and these days who isn’t - could be negatively impacted by a faltering Dow Jones Industrial Average [DJIA],” Sloan added.

He noted that Greece’s sovereign debt woes of the last six months have already adversely affected the Dow index and other US stock markets from time to time.

If the US were to fail to raise its debt limit by next Tuesday, “imagine what the US default would do to the markets”, he said.

“I would suspect that that borrowing costs will likely increase in the short term, maybe not a lot but by something”, if the US misses the debt ceiling deadline, Sloan said.

“And this would then cause companies to hold off on new investments, and this clearly would then trickle through the economy and could result in a true double-dip recession if foreign markets sense that there is no clear resolution in sight,” he said.

Among other consequences, a US default or even a credit rating downgrade would put downward pressure on the US dollar. 

That might make US exports more competitive in foreign markets, Sloan noted, but it also would increase the cost of US imports, including for raw materials that many US chemical companies need.

“The cost of raw material imports could far outpace any export boost resulting from a cheaper dollar, and profitability would suffer,” Sloan said.

If the US goes into default or its credit worthiness is downgraded, “What if foreign countries start to lose faith in their US reserves and demand payback now?” he said.

“And what if foreign markets start demanding greater assurances from US suppliers that they too will not default?” Sloan said. “There could be additional restrictions imposed on us by our export markets to counter the weaker dollar’s export-boosting benefit.”

But, he added, no one can really say what might happen if the US were to go into default or simply has its credit rating downgraded.

“This would be the first time in our history that our nation’s credit rating is downgraded, so we are in unchartered territory,” he said.

($1 = €0.70)

Paul Hodges studies key influencers shaping the chemical industry in Chemicals and the Economy

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