Dysfunctional Debt Crisis Rings Alarm Bells Abroad
Christine Lagarde
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The Fiscal Times
October 14, 2013

Panic began to set in around the world on Monday, as talks between Republicans and Democrats aimed at raising the U.S. debt ceiling broke down over the weekend.

The fiscal standoff in Washington finally brought a reaction from China, the country holding the largest share of America’s debt.  China's official news agency took a gut punch at what they call a hypocritical nation with a dysfunctional government.

"As US politicians of both political parties are still shuffling back and forth between the White House and the Capitol Hill without striking a viable deal to bring normality to the body politic they brag about, it is perhaps a good time for the befuddled world to start considering building a de-Americanized world," the editorial said. 

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In recent days, for the first time, global economic and political leaders acknowledged that a U.S. default would sink not just the U.S. economy, but economies around the world.  

The reality of the U.S. political stalemate was evident at the International Monetary Fund’s annual meeting in Washington last week. Economic officials from around the world seemed to collectively recognize just how wide the political impasse in Washington was. They also seemed to collectively recognize that the broken political process in Washington had implications far beyond the United States. 

"I would like to express our wish that our U.S. counterparts will find a solution to this as quickly as possible... Otherwise we can't move ahead," Russian Finance Minister Anton Siluanov told officials Friday in what he thought was a closed-door meeting. He said he was not confident that Congress and the White House would come to an agreement. "There doesn't seem to be a prospect for that," he said. 

The most alarming statements came from IMF chief Christine Lagarde, who warned of catastrophic consequences of U.S. inaction repeatedly over the weekend.

“If there is that degree of disruption, that lack of certainty, that lack of trust in the U.S. signature, it would mean massive disruption the world over, and we would be at risk of tipping yet again into a recession,” she said this weekend on NBC. 

She also dismissed notions expressed by members of the Tea Party, who have said the shutdown would be good for the U.S. economy. She singled out Sen. Rand Paul out by name for his assertion that "not raising the debt ceiling means you have to balance your budget. It doesn’t mean you have to default." 

“When you are the largest economy in the world, when you are the safe haven in all circumstances, as has been the case, you can’t go into that creative accounting business,” Lagarde said in a direct rebuke of Paul’s statement.

World Bank President added Jim Yong Kim his warning on Saturday, saying, “We’re now five days away from a very dangerous moment… Inaction could result in interest rates rising, confidence falling and growth slowing.”

WORLD MARKETS FLAT    
In Germany, the DAX was down just 2 percent. The CAC-40 in France was down by the same amount. In England, the FTSE 100 traded higher, up .1 percent. Analysts attributed the lack of movement to the continued hope that the impasse in the U.S. could be bridged.

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"Clearly, despite being unsuccessful so far, the negotiations on Capitol Hill are providing some comfort for traders, who remain reluctant to heavily sell their positions," Craig Erlam, market analyst at Alpari, told the Associated Press.

But economic analysts aren't convinced. There is especially strong sentiment that the failure of the United States to pay its debt would hit Asia especially hard.

"With their vast investments in U.S. government bonds and their extensive trade relationships with the U.S., countries across Asia are particular anxious to ensure that the absurdities of America's political system do not become a calamity for the world economy, which would indeed be the result if the U.S. government defaulted on its financial obligations," warned Ken Courtis, chairman of Asia Frontier Capital.

Even with stocks flat, the true test of global sentiment on the U.S. economy comes Tuesday. That's when the U.S. bond market reopens. If interest rates spike, it could spook equity traders, and the fallout from the political crisis would begin in earnest.

"The U.S. government bond market is the bedrock of the world's financial system. Virtually all other assets are priced, one way or another, relative to U.S. Treasury bonds," Courtis said. "The stakes have never been higher."

An editor-at-large for The Fiscal Times, David Francis has reported from all over the world on issues that range from defense to border security to transatlantic relations.