U.S. Just Days away from 'Very Dangerous Moment'
October 13, 2013, 9:28 am
World Bank President Jim Yong Kim addresses the plenary session at the start of
the annual IMF-World Bank fall meetings in Washington, October 11, 2013.
REUTERS/Jonathan ErnstWASHINGTON (Reuters) - The president of the World Bank on Saturday warned the United States was just "days away" from causing a global economic disaster unless politicians come up with a plan to raise the nation's debt limit and avoid default.
US Borrowing Crisis 'Days away' From Disaster, says World Bank Head
Jim Yong Kim: "We are now five days away from a very dangerous moment"
US Budget Row
The president of the World Bank, Jim Yong Kim, has warned that the United States is just "days away from a very dangerous moment" because of the government's borrowing crisis.
He urged US policymakers to reach a deal to raise the government's debt ceiling before Thursday's deadline.
The US Treasury will start to run short of funds if no agreement is reached for it to borrow on financial markets.
Mr Kim warned this could be a "disastrous event" for the world.
"The closer we get to the deadline the greater the impact will be for the developing world.
"Inaction could result in interest rates rising, confidence falling and growth slowing," said Mr Kim, speaking at the World Bank's annual meeting in Washington.
“Start QuoteThere are three examples in US history that come close to default, with the most recent occurring in 1979”
"If this comes to pass it could be a disastrous event for the developing world and that will in turn greatly hurt the developed economies as well," he added.
'Uneasy'
If the US does run short of cash, this could cause it to default on its debts, a development which would be likely to have a severe effect on financial markets around the world.
The BBC's Andrew Walker said that finance ministers from other countries think the US probably won't default, but they are uneasy and want the crisis resolved very soon.
Republicans and Democrats failed to come to an agreement on Saturday, but Senator Dick Durbin, a Democrat, said the aim was to reach a deal on extending the debt limit before markets reopen on Monday.
The White House rejected a deal for a short-term increase to the borrowing limit.
"It wouldn't be wise, as some suggest, to just kick the debt ceiling can down the road for a couple of months, and flirt with a first-ever intentional default right in the middle of the holiday shopping season," said President Barack Obama.
Shutdown
The US government has been in partial shutdown since Congress missed a 1 October deadline to pass a budget, with politicians being unable to agree funding for current spending.
This has resulted in hundreds of thousands of federal employees being sent home and government offices closing.
Arizona Governor Jan Brewer announces the reopening of the Grand Canyon National Park
Republicans refused to approve the new budget unless President Obama agreed to delay or eliminate the funding of the healthcare reform law of 2010.
US Treasury Secretary Jack Lew has estimated that each week the government is shut down, 0.25% is shaved off economic growth, which was already expected to be a sluggish this quarter.
Debt Burden
Mr Lew has also has warned that letting talks over the debt ceiling go down to the wire "could be very dangerous".
The current debt limit of $16.699 trillion was reached in May.
“Start QuoteIt would ripple through the world economy in a way that you couldn't possibly understand”
Jamie Dimon Chief executive, JP Morgan
Since then the US Treasury has been using what are called extraordinary measures to keep paying the bills, but those measures run out on 17 October.
Every week, the Treasury also has to refinance $100bn worth of debt in the form of US government bonds known as treasuries.
The US also has to pay interest on its huge debt burden.
An inability to pay that interest, or pay back debt if required, would put the US into default.
On Saturday, Jamie Dimon, boss of the American bank JP Morgan said the possible repercussions did not bear thinking about.
"You don't want to know what would happen," he said.
Debt Ceiling Crisis has Other Nations Angry and Scared
By Anthony Zurcher BBC News, Washington
Mr Obama has vowed not to negotiate terms with Republicans in Congress over a bill to raise the US debt ceiling
US Budget Row
At the start of the current US budget standoff, other countries viewed the situation with a mix of sympathy, concern and bemusement. With the 17 October deadline for raising the debt ceiling approaching, however, the international view has changed to fear and anger.
While many abroad have considered a US government shutdown unfortunate and potentially damaging to the global economy, it is a development the world has survived before. But the last time the US came close to defaulting on a sovereign debt obligation was in 1790, when the country was a backwater ex-British colony, a bit player on the world stage.
More recent examples of sovereign default include Mexico (1982), Russia (1998), Argentina (2001) and Greece (2012). Each of those sparked global financial crises that required US intervention. It is unsurprising, then, that with the US itself possibly causing the economic conflagration, foreign observers are hitting the panic button.
'Fundamentally Wrong'
“Start QuoteThis is a matter involving the good faith and credit of the United States”
L Ian MacDonald Columnist, Ottawa Citizen
"What is chilling is that US politicians are willing to engage in a game of brinkmanship that is tantamount to detonating a nuclear device over their economy," writes the Times of India. "A bunch of intransigent American politicians are holding not just President Barack Obama, but the entire world to ransom."
Although the enormity of the crisis has yet to sink in for many around the world, those who are paying attention are starting to call into question an American system of government that would reach this point.
"There is something fundamentally wrong with a system that leaves a country without direction, in stagnation, without a budget and potentially without the wherewithal to settle its debts," writes
UAE businessman Khalaf Ahmad Al-Habtoor in The Arab Times.
"Obama must get his own house in order not only for the sake of the American people, but also to retain his nation's revered top slot in the global economic and geopolitical hierarchy before the world concludes the US is just an aging tiger without teeth."
In 2009, Zimbabwe adopted the US dollar as an official currency in order to stanch hyperinflation and bring stability to its economy. Now, it faces a possible American financial collapse that would drag it down, too.
"If the US defaults on its debt this would result in the country's credit rating plummeting and the US dollar falling and thereby causing havoc in the international financial markets," writes the nation's Financial Gazette.
'Thanks, Washington'
A debt default could cause a large drop in the value of US currency.
As America's largest trading partner, Canada faces a heightened threat, as well.
L Ian MacDonald, a columnist for the Ottawa Citizen, writes,
"This is a matter involving the good faith and credit of the United States." And because the crisis is already causing the Canadian dollar to increase in value relative to the US dollar, it is adversely affecting Canadian exports. "Thanks, Washington, we needed that," he writes.
Overseas leaders are also expressing their concerns - particularly in Japan and China, the two largest foreign holders of US national debt.
"The US must avoid a situation where it cannot pay, and its triple-A ranking plunges all of a sudden," Japan's Finance Minister Taro Aso said.
"The US is the world's biggest economy and a major country issuing reserve currency," China's Vice-Minister of Finance Zhu Guangyao said during a foreign ministry press conference. "Safeguarding the debt is of vital importance to the economy of the US and the world."
International Monetary Fund official Jose Vinals said that if the US defaults, it "adversely affects advanced economies, emerging markets, low-income countries.
It will be a worldwide shock."
The Economist writes that hitting the debt ceiling could mean the US would "slash spending so deeply that it causes a recession. Or it could default on its debts, which would be even worse, and unimaginably more harmful than a mere government shutdown.
No one in Washington is that crazy, surely?"
It's a rhetorical question, but one that many in the world are starting to take seriously.