World fears potentially catastrophic effects of US debt default

Economic leaders warn that failing to come to a debt-ceiling agreement could hurt dozens of economies globally

A mans walks past a board displaying the Nikkei index of the Tokyo Stock Exchange on Oct. 2.
Kazuhiro Nogi/AFP/Getty Imagesa

The probability that the United States could default on its debt on Oct. 17 because of a political impasse over a budget bill seems increasingly likely to governments, traders and financial analysts around the world.  

Global markets responded to the worries by falling sharply as politicians in the U.S. inched closer to a scenario that many say would have catastrophic consequences for virtually every nation on earth.

On Tuesday, leaders of several countries, as well as the chief economist for the International Monetary Fund, urged U.S. lawmakers to overcome their differences and pass a resolution to raise the debt limit of the U.S. government beyond its current level of $16.7 trillion.

Click for news and analysis on the government shutdown

"The effects of any failure to repay the debt would be felt right away, leading to potentially major disruptions in financial markets," IMF's chief economist Olivier Blanchard said in a press briefing. "It could well be that what is now a (U.S.) recovery would turn into a recession or even worse."

But Republicans and Democrats seemed no closer to coming to an agreement on how to raise the debt limit on Tuesday.  

Republican leaders want any debt-limit increase to be tied to a reduction of government spending, while Democrats want to pass a "clean" bill with no spending reductions attached. President Barack Obama has called House Republicans' strategy a form of extortion.

"Members of Congress, and the House Republicans in particular, don't get to demand ransom in exchange for doing their jobs," he said at a press conference.

But Republicans have said the president must give in to some Republican demands in order for the debt limit to be raised. If the ceiling isn't raised, the U.S. will not be able to pay debts to nations from which it has borrowed.

International concern

The political posturing between the two parties has worried some of the biggest U.S. lenders.

"The U.S. must avoid a situation where it cannot pay, and its triple-A (credit) ranking plunges all of a sudden," Japan's finance minister Taro Aso told reporters after a cabinet meeting, according to Reuters. "The U.S. must be fully aware that if that happens, the U.S. would fall into fiscal crisis.”

Aso said he was worried that a financial calamity in the U.S. would also push up the value of the yen against the dollar, which would harm Japan's export economy. Japan holds about $1.14 trillion of U.S. debt, according to the U.S. Treasury Department.

China holds slightly more, giving its leaders reason to worry about a U.S. default too.

On Monday, Chinese Vice Finance Minister Zhu Guangyao said Beijing had been in touch with Washington over the standoff.

China is "naturally concerned about developments in the U.S. fiscal cliff," Zhu told reporters, saying it was Washington's "responsibility" to avoid a debt crisis and ensure the safety of Chinese investments.

Even smaller holders of U.S. debt are becoming concerned.

Swiss National Bank Chairman Thomas Jordan warned Tuesday that failure to lift the U.S debt ceiling could have damaging international repercussions and he urged lawmakers to make a deal.

"I hope that the U.S. Congress will find a solution before the time limit ... we saw the last time it can really have very negative impacts on international financial markets," he said, according to Reuters, referring to the 2011 standoff that brought the U.S. to the brink of a debt default.

Still, many are holding out hope that a solution will be found before Oct. 17.

IMF's chief economist said he still thinks default is unlikely. And analysts said that while there was reason for concern, there's no reason to panic, at least not yet.

"If the market was genuinely reacting, actually started to believe in a default, then the equity market would be falling like a stone…" Marc Ostwald, strategist at Monument Securities, told Reuters

Markets may not be dropping like a stone, but they are dropping.

On Tuesday, without exception, every stock market in North and South America, as well as every market in Europe saw losses. The FTSE 100, one of Europe's most widely used indexes dropped by over a percentage point.

But it's not clear how much politicians in the United States are listening to the mounting foreign pressure to make a deal.

One of the only mentions of the effects of the international community on negotiations came from U.S. Republican representative from Texas Pete Sessions last week.

"Look," he said. "We're not French. We don't surrender."

Al Jazeera and wire services

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