Unease at the Greek government’s to meet its obligations vis a vis debt have pushed markets lower and seen the Euro fall in recent weeks. It is clear that the EU will not allow a full Greek default to happen and so the market movements have been more of a stutter than a fall. But spare a thought for what might happen if the world’s largest economy failed to meet its obligations.
The US Congress and Senate must pass legislation by 2nd August to raise its $14.2 trillion debt ceiling or the nation will default on some of its debt obligations. Were this to happen, the consequences for the global economy would be catastrophic with confidence instantly evaporating and the Dollar would take a nosedive (ironically, this would ease the debt problem which is Dollar denominated, allowing the US to use foreign reserves to pay down the debt somewhat). It must be recalled that what really triggered the global financial crisis was a loss of confidence about the financial sector.
The Devil is in the Details
Both major American parties agree that the debt crisis which confronts the US economy must be tackled, but the devil is in the details. The Republicans sponsored a bill which would have seen the debt ceiling raised by $2.4 trillion without any sending cut riders and then voted it down. The Republicans want to force the President into adopting spending cuts likely (in the Democrat’s opinion) to harm social security programmes such as Medicare and impact clean energy and education initiatives. The Democrats wish to see cuts that would hit the wealthiest disproportionately harder and put an end to oil subsidies (worth billions of Dollars) according to their rivals.
Both sides seem to agree that roughly four trillion Dollars of spending cuts need to be agreed to control the deficit and set the economy on a path to fiscal prudence. Political posturing and brinkmanship will probably continue until the last minute, but in the end, the US will step back from the abyss and agree a deal. Surely?