The threat of a U.S. default is becoming more and more ominous, as this Thursday the Treasury will begin to run short of funds- and the implications for both Britain’s and the world’s fragile recovery are worrying.
The battle between House of Representatives speaker John Boehner and President Obama continues to rage on, with both sides digging their heels in and refusing to negotiate a deal on the budget. The shutdown is certainly an important issue, for U.S. citizens, its huge. However, the event of a US default has dramatic implications for the world– an event that could potentially happen in just a matter of days.
For those unaware, the present debt ceiling rests at $16.699 trillion- a figure last set in May. Since then Congress has had to ad lib with ‘extraordinary’ measures in order to keep paying its bills- however the deadline for reaching a new one happens to be this Thursday- whilst the first shutdown since 1996 drags on.
One might question whether we truly need to be worried. Certainly, shutdowns are rare of late, but they used to be a much more common occurrence, and thus we need not worry. Defaulting however, is much rarer- only twice in its history, but even these are nowhere near as damaging as the potential catastrophe that could soon be unleashed on the global economy. Once, in 1812, during wartime and one where they can certainly be forgiven, being at the time, a small nation in its infancy. The other, as recent as 1979, was more of a technical issue, with a few delayed repayments despite a last minute deal before the official deadline. However the one approaching is much larger, more menacing and more real.
Leading figures have warned of an impending economic disaster. IMF chief Christine Lagarde warned “if there is that degree of disruption, that lack of certainty, that lack of trust in the US signature, it would mean massive disruption the world over and we would be at risk of tipping yet again into recession”. Similarly, Jim Yong Kim, her World Bank counterpart has also expressed his concern over the situation warning that the world was only “days away from a very dangerous moment”, imploring the warring sides to reach a deal to raise the government’s debt ceiling before Thursday 17th October.
Despite the British media been rather complacent about the issue, the potential default would have drastic implication for our own economy. Trade with the United States has increased dramatically since the Eurozone Crisis, making us more inextricably linked with the American economy than ever before. Figures from the ONS show that this year Britain’s value of exports to the United States were higher than the average 2012 level, fuelling a trade surplus that will be dramatically affected in the event of a U.S. default, potentially affecting us on a level deeper than the last financial crisis in 2008.
True, it might not happen. Boehner and Obama might be sensible, ‘un-dig’ their heels and reach a deal. However 2 weeks into the Shutdown, with reports showing no signs of a deal approaching, and only a day until the perceived deadline- Britain has plenty of reason to be worried by our cousins across the pond.