Goldman sees US shutdown over spending “more likely than not”

The United States government looks "more likely than not" to shut down later this year due to political differences on spending that could temporarily hit economic growth, Goldman Sachs analysts said in a research note.

The Goldman economics analysts said prior shutdowns - which occur if Congress fails to pass annual spending bills - have stemmed either from disagreement on the level or distribution of spending, or a dispute over other issues that one party wants to address in spending legislation.

"At the moment, both types of risks are in play," Goldman said in the note.

A broad government shutdown stands to directly reduce growth by around 0.15 percentage points for each week it lasts, while the reduction could be 0.2 percentage points a week when including a modest impact in the private sector, according to Goldman.

However, the analysts said, in the quarter following the government reopening, growth would rise by the same amount.

Markets have not had strong reactions to three past shutdowns, in 1995-96, 2013, and 2018-19, according to the note.

Equity markets were flat or up at the end of those shutdowns, though in each instance equity prices were lower at some point in the days following the start of the shutdown than when it began, the analysts wrote, while the 10-year Treasury yield declined more consistently after the start of the shutdowns.

The Goldman analysts said a shutdown is not a foregone conclusion, pointing to support for a temporary extension after the end of the fiscal year on September 30, 2023.

They also noted that compared to the severe macroeconomic impact of a failure to raise the US debt limit, the less dramatic economic effect of a shutdown also makes it more likely that Congress fails to act in time.

UBS examining takeover of Credit Suisse

UBS AG was examining on Saturday a takeover of embattled lender Credit Suisse that could see the Swiss government offer a guarantee against the risks involved.

The 167-year-old Credit Suisse is the biggest name ensnared in the market turmoil unleashed by the collapse of US lenders Silicon Valley Bank and Signature Bank over the past week, and its slide has fanned fears of broader banking problems.

To get the crisis under control, UBS was coming under pressure from the Swiss authorities to carry out a takeover, Reuters' sources said. Under the plan, Credit Suisse's Swiss business could be spun off, they added.

Credit Suisse Chief Financial Officer Dixit Joshi and his teams were meeting over the weekend to assess their options for the bank, people with knowledge of the matter said.

The bank's share price swung wildly this week, during which it was forced to tap US$54 billion in central bank funding, and Credit Suisse had lost a quarter of its market value by Friday night.

The mood in Switzerland, long considered an icon for banking stability, was pensive as executives wrestled with the future of the country's biggest lenders.

"Banks in permanent stress" read the front page headline of the Neue Zuercher Zeitung newspaper on Saturday morning.

Credit Suisse ranks among the world's largest wealth managers and is considered one of 30 global systemically important banks whose failure would cause ripples throughout the entire financial system.

In a sign of its vulnerability, at least four of Credit Suisse's major rivals, including Societe Generale SA and Deutsche Bank AG, have put restrictions on their trades involving the Swiss bank or its securities.

Goldman Sachs cut its recommendation on exposure to European bank debt, saying a lack of clarity on Credit Suisse's future would put pressure on the broader sector in the region.

Although the banking system was more robust than it was at the time of the financial crisis in 2008, a more forceful policy response is likely needed to bring some stability, Goldman analyst Lotfi Karoui wrote in a note to clients.

Already this week, big US banks provided a US$30 billion lifeline for smaller lender First Republic while US banks altogether have sought a record US$153 billion in emergency liquidity from the Federal Reserve in recent days.

This reflected funding and liquidity strains on banks, driven by weakening depositor confidence, said ratings agency Moody's, which this week downgraded its outlook on the US banking system to negative.

In Washington, focus turned to greater oversight to ensure that banks - and their executives - are held accountable.

US President Joe Biden called on Congress to give regulators greater power over the sector, including imposing higher fines, clawing back funds and barring officials from failed banks.

Some Democratic lawmakers asked regulators and the Justice Department to probe the role of Goldman Sachs in SVB's collapse, said the office of Representative Adam Schiff.

Banking stocks globally have been battered since Silicon Valley Bank collapsed, raising questions about other weaknesses in the financial system.

US regional bank shares fell sharply on Friday and the S&P Banks index posted its worst two-week calendar loss since the pandemic shook markets in March 2020, slumping 21.5%.

First Republic Bank ended Friday down 32.8%, bringing its loss over the last 10 sessions to more than 80%.

While support from some of the biggest names in US banking prevented First Republic's collapse this week, investors were startled by disclosures on its cash position and how much emergency liquidity it needed.

The failure of SVB, meanwhile, brought into focus how a relentless campaign of interest rate hikes by the US Federal Reserve and other central banks, including the European Central Bank this week, was putting pressure on the banking sector.

Many analysts and regulators have said SVB's downfall was due to its specialized, tech-focused business model, while the wider banking system was much more robust thanks to reforms adopted in the years after the global financial crisis.

But a senior official at China's central bank said on Saturday that high interest rates in the major developed economies could continue to cause problems for the financial system.