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US Debt Crisis Worries World Markets


US Debt Crisis Worries World Markets
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US Debt Crisis Worries World Markets

Less than a week before the U.S. government could run out of money to pay its bills, the world's financial markets are already showing concern. If officials cannot agree to let Washington borrow more money before the deadline, the global economy will likely feel the pain.

After days of losses, stocks have been gaining on word that President Barack Obama and top Republican lawmakers are discussing ways to keep the U.S. government from defaulting on its obligations.

The president says a default would endanger America's standing in the world economy.

“It would disrupt markets. It would undermine the world’s confidence in America as the bedrock of the global economy, and it might permanently increase our borrowing costs," said President Obama.

Obama's Treasury secretary, Jack Lew, told senators the uncertainty around raising the debt limit is already stressing financial markets, meaning the U.S. government will have to pay higher interest rates to borrow money.

“At our auction of four-week Treasury bills on Tuesday, the interest rate nearly tripled, relative to the prior week’s auction, and it reached the highest level since October 2008," said Lew.

Economist Thomas Hungerford, at the Economic Policy Institute says that means trouble for the world economy.

He says higher interest rates on Treasury notes could make loans more expensive for American businesses and consumers, driving up the cost of major purchases and pushing sales down.

“If consumers stop buying, they are going to stop buying foreign goods, so imports into the U.S. will be affected, which is going to affect foreign manufacturers and foreign providers of services," said Hungerford.

America's biggest creditors are nervous about a possible default on U.S. debt. China and Japan are holding $2.5 trillion in Treasury bonds between them.

China's vice finance minister has called on U.S. officials to end their standoff and pay their bills.

"We ask that the United States earnestly takes steps to resolve in a timely way before October 17 the political issues around the debt ceiling and prevent a U.S. debt default," said Zhu Guangyao.

Traders who buy U.S. bonds for foreign governments have recently backed away from buying short-term Treasury bills.

However, leaders of major bond firms are confident the crisis will be resolved.

Bill Gross, CEO of PIMCO, said, “Is there a possibility of a debt default? Really, no. I think it is basically theatrics posed by politicians and the press."

But Larry Fink, who leads BlackRock, another major investment firm, said the possibility of a default should never have occurred.

“Every country in the world looks up to this country, and the fact that we even have a narrative about the questioning of a default is entirely unacceptable, and importantly, it will have a psychological change in how people look to the United States," said Fink.

The world's markets are watching the comings and goings in Washington, hoping for a quick resolution.
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