The impending deadline to raise the US debt ceiling is fast approaching. Both Christine Lagarde of the IMF and Jim Yong Kim, president of the World Bank, have warned the US that failure to raise the debt ceiling this Thursday (October 17, 2013) can (and probably will) have catastrophic consequences for the world economy. Despite these warnings and despite the warnings by President Obama himself, not much seems to be happening in the Senate and the Congress to resolve the crisis.
Up until now the markets (both the bond and equity markets) have not shown a great deal of volatility, even as the deadline approaches. Since the US government has never defaulted on their sovereign debt, there seems to be an implicit belief that the US government will resolve the debt ceiling crisis and that they won’t default. However, as we get closer to the Thursday deadline, don’t be surprised if the markets show increased volatility. The bond markets are especially vulnerable to any perception of a potential default and any suspicion of default by the US government will see large spikes in both the short term and long term interest rates.
If the US fails to raise the debt ceiling by Thursday, borrowing costs for everyone in the world will increase. This is significant as it will ensure a substantial increase in the cost of doing business for both companies and governments. More significantly, if any banks are perceived to be weak and vulnerable to increased interest rates, there could be a freeze in the credit market between banks, which would dry up the inter-bank monetary flows and the respective cash flows back out into the private sector. This is what happened in 2008 and any default (or perception of a default) by the US government will have far more drastic effects on the US and global economy than the 2008 sub-prime mortgage crisis. Cash flow is the life blood of the economy and any threat to the free flow of capital between governments, banks and the private sector will almost certainly have destructive effects to the ability of either of these entities to function efficiently.
Some Republicans have downplayed the consequences of not increasing the debt ceiling by this Thursday, but this is not the general sentiment of finance professionals and leaders of global organizations. While the US sovereign debt is a significant concern over the long term, this is not the time to address this problem. The long term overall reduction in the US government debt should be discussed at another time and outside of the public eye. It is imperative that the debt ceiling question be resolved in a timely manner so that the world economy continues to function as it should, and people’s livelihoods and savings are not threatened.
Up until now the markets (both the bond and equity markets) have not shown a great deal of volatility, even as the deadline approaches. Since the US government has never defaulted on their sovereign debt, there seems to be an implicit belief that the US government will resolve the debt ceiling crisis and that they won’t default. However, as we get closer to the Thursday deadline, don’t be surprised if the markets show increased volatility. The bond markets are especially vulnerable to any perception of a potential default and any suspicion of default by the US government will see large spikes in both the short term and long term interest rates.
If the US fails to raise the debt ceiling by Thursday, borrowing costs for everyone in the world will increase. This is significant as it will ensure a substantial increase in the cost of doing business for both companies and governments. More significantly, if any banks are perceived to be weak and vulnerable to increased interest rates, there could be a freeze in the credit market between banks, which would dry up the inter-bank monetary flows and the respective cash flows back out into the private sector. This is what happened in 2008 and any default (or perception of a default) by the US government will have far more drastic effects on the US and global economy than the 2008 sub-prime mortgage crisis. Cash flow is the life blood of the economy and any threat to the free flow of capital between governments, banks and the private sector will almost certainly have destructive effects to the ability of either of these entities to function efficiently.
Some Republicans have downplayed the consequences of not increasing the debt ceiling by this Thursday, but this is not the general sentiment of finance professionals and leaders of global organizations. While the US sovereign debt is a significant concern over the long term, this is not the time to address this problem. The long term overall reduction in the US government debt should be discussed at another time and outside of the public eye. It is imperative that the debt ceiling question be resolved in a timely manner so that the world economy continues to function as it should, and people’s livelihoods and savings are not threatened.
