US debt default: is world facing 'economic Armageddon'?
Markets haven't panicked yet, but stalemate in Congress sets scene for 'catastrophic' default
ONE for the diary: the deadline for what has been billed as "global financial Armageddon" is 17 October. If Congress does not agree to raise the $16.7 trillion debt ceiling on that day, the US will default and the shock to the financial system "will shake the world", says the Daily Mail. Here are five key questions about a debt default and its global ramifications:
Why does the debt ceiling need to be raised? The ceiling - a borrowing limit imposed on the US government by Congress - is the amount of cash the White House is allowed to borrow to finance the nation's debt. At the moment the limit is $16.7 trillion. The secretary of the US Treasury Jack Lew has identified 17 October as the day the limit will have to be raised to maintain the "full faith and credit of the United States". In other words, it's the day he'll need to borrow a lot more cash to pay the nation's bills and service the world's biggest overdraft.
So, why doesn't the US just raise the debt ceiling? The debt ceiling has always been a political hot potato. Congress typically uses protracted negotiations about the issue to extract promises and compromises from the President. This year the new ceiling needs to be agreed by a Congress that is at loggerheads over President Obama's universal health care laws. The dispute has already caused the first shutdown of the US government in almost 18 years. But the fear is that the stand-off between Democrats and Republicans will lead to a far more serious impasse - a stalemate on raising the debt ceiling.
What will happen if the ceiling isn't raised? The Daily Telegraph's Jeremy Warner, says the consequences of a default would be cataclysmic. "Given the key position occupied by US Treasuries in the world's money system, the effect of such a default would be like a death star exploding." According to The Atlantic, a default would "crush consumer confidence, send markets cliff-diving, and slow down our already slow recovery - if not push us back into recession". A replay of the 2008 financial crisis, in other words. And that's a best-case scenario. It could also be "a historic blunder that not only flattens the economy today, but also forever raises our borrowing costs and lowers our standard of living tomorrow".
Will the damage be limited to the US? Absolutely not. The effects of a US default would ripple across the globe, killing off the tentative economic recovery in areas such as the eurozone.
So, why isn't everyone panicking? Markets are starting to become more "edgy" as the deadline approaches, reports NBC News. But for now, most traders seem to believe America's lawmakers will not allow the US to default. Markets are certain to become more volatile, however. "There is precedent for a government shutdown, but there is no precedent for a default," Lloyd Blankfein, the chief executive of Goldman Sachs, told the Financial Times. ·