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US Debt Default Would Have Global Impact, Experts Say

US Debt Default Would Have Global Impacti
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October 09, 2013 3:19 PM
With the U.S. government shutdown in its second week and the possibility of an American debt default next week, the global economy is beginning to feel the effects. VOA’s Al Pessin reports from London.

"US Debt Default Would Have Global Impact" - related video report by Al Pessin

Al Pessin
— With the U.S. government shutdown in its second week and the possibility of an American debt default next week, the global economy is beginning to feel the effects.

The action, or lack of action, on the U.S. government’s funding crisis is in Washington, but concern about it spans the globe.  One financial market indicator known as the "fear index" jumped 15% on Monday alone.

But while the headlines look ominous, London-based Wall Street Journal reporter Charles Forelle noted that global markets have so far not had the strong negative reaction some had expected.

“If there’s an apocalypse on the horizon, the financial markets don’t see it coming,” he said.

Global markets have been drifting lower, but have not fallen dramatically.  Still, Forelle warned the enthusiasm over investing will change dramatically if the shutdown continues, and especially if the U.S. government defaults on its debt.

“The other longer, bigger scale issue is the destruction of confidence in the U.S. government and in U.S. treasuries [securities].  And that’s a much more difficult thing both to measure and to fix,” Forelle said.

The US debt limit:

  • Is the total amount of money the US government can borrow to meet existing legal obligations
  • Obligations include Social Security, Medicare, military salaries, interest on the national debt, tax refunds
  • Raising the debt limit does not authorize new spending commitments
  • Failing to increase the debt limit would cause the government to default on its legal obligations
  • Since 1960, Congress has acted to raise the debt limit 78 times

Source: US Department of Treasury
Such concerns are keenly felt in places like this, the hub of operations at the London investment firm Charles Stanley and Company.  Its chief investment commentator, Garry White, said the room will look very different next week if there is a default.

“Phones would be ringing off the hook," White predicted.  "There would be panic selling as investors tried to minimize their losses.  And it would be mass panic in the investment community.”

Experts say if Congress does not raise the debt ceiling and allow the government to continue routine payments, there would be a cascade of defaults worldwide, and financial institutions would not know how to set some of their key interest rates.  They say the financial collapse of five years ago that hurt people around the world would be repeated, and could possibly be worse.

White said that prospect could just be enough to motivate the politicians in Washington to settle their differences.

“One would hope that the consequences are so serious that they will sort it out before the deadline arrives. And we think it’s in the interest of people on both sides to resolve this issue before there is some sort of financial Armageddon,” he said.

No one in Washington wants that.  But concern is growing about whether the officials involved will do what is necessary to avoid it.

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