Crimped credit availability and a delayed economic recovery are being treated as certainties by many energy firms as the prospect of a potential default by the US federal government or a downgrade of its debt continue to dominate political and business news.
“The electric power industry is probably the most capital-intensive in the US,” Steptoe Johnson lawyer Dave Raskin told Breaking Energy. “That means anything that increases the cost of borrowing or complicates the debt markets worries the industry and makes it harder for them to build needed infrastructure.”
The potential impacts of a default by the US federal government or a downgrade of its debt on the energy sector remain deeply complex and multifaceted, but markets are already showing signs of increased uncertainty as companies note the impact of even a late-stage agreement on raising the US government’s debt ceiling on consumers.
Read the reaction of one major energy industry leader to the national debt crisis in: Pataki Gets Presidential.
Gaming The End Game
Votes on competing bills that would cut government spending were delayed until Thursday less than a week before what one representative of alternative energy firms on Capitol Hill called “Armageddon” for renewable energy firms, many of which rely on tax credits or other federal incentives to scale up their business plans.
Even without a complete lock-up in financial markets in response to a default, funding for energy projects remains under fire in constantly-evolving debt-cutting bills before the House and Senate. The possibility that a compromise could at least provide some certainty on spending and tax policy through 2012 for energy firms is more than counteracted by the already-spreading impacts on broader economic growth.
While trading in government bonds has remained subdued, financial market volatility as measured by the Chicago Board of Exchange’s VIX contract has been climbing, although the most recent measure of the volatility index shows it still below its 52-week high.
Direct trade in energy commodities has been focused more on the immediate impact of a shift in the value of the US dollar, traders at CME Group, where the benchmark West Texas Intermediate oil futures contract trades, said. Traders said that the downgrade issue was potentially more pressing, as collateral in hedging is often held in highly-rated US treasury bonds, and a shift in their rating could press traders to unwind trades or seek alternative collateral all at the same time.
The downgrade would be a “systemic event” in its own right, Securities Industry and Financial Markets Association CEO Tim Ryan said earlier this week, with the higher rates for treasury securities bleeding through the entire economy and impacting both short-term trading and longer-term investment planning.
Global, Local And Everything In Between
The US financial markets have a particularly strong impact on global markets, the International Monetary Fund said last week in pressing for a resolution on US debt issues.
“US performance and policies have uniquely large spillovers to the rest of the world mainly through financial linkages,” the IMF noted in a consultation document issued earlier this week.
The longer-term impacts are likely to arise from a slowing or reversal in the moribund US economic recovery that emerged from the recession deepened by the late 2008 financial crisis. Consumer confidence has already begun to decline as the debt deadline of August 2 has approached, investment bank Nomura noted in its most recent Global Weekly Economic Monitor.
“Disarray in the US House of Representatives appears to be dampening consumption by households,” Nomura noted, citing a steep decline in consumer confidence surveys. “Given the dampening effect the debt ceiling impasse appears to have had on the recovery, a quick resolution by US lawmakers is in the best interests of all.”
Photo Caption: An employee counts money at a branch of Industrial and Commercial Bank of China Limited (ICBC) on July 26, 2011 in Huaibei, Anhui Province of China. According to the China Foreign Exchange Trading System, The Chinese currency, Renminbi (RMB), Tuesday rose 33 basis points from previous trading day to a record high of 6.4470 against the US dollar.