During a press conference this week, President Obama expressed his concern about the approaching deadline for raising the debt ceiling as he urged U.S. lawmakers to stop squabbling. He suggested that they reach a compromise by both raising the legal borrowing limit and slashing the government deficit at the same time.
You see, the Republicans and the Democrats aren’t seeing eye to eye when it comes to trimming the huge U.S. deficit. On the one hand, Republicans refuse to raise the debt ceiling unless there are accompanying spending cuts. On the other hand, Democrats are uneasy about implementing belt-tightening measures and would rather focus on increasing tax revenue instead.
Can they reach an agreement within the next three weeks? Obama seems intent on making the Republicans and Democrats come to terms since he plans to keep convening the party leaders every single day until they strike a deal. As he put it, it’s time to “pull off the Band-aid” and “eat our peas,” referring to something that must be done even though it’s tough.
If you have been keeping up with my updates, you’d know that I wrote an article about the U.S. debt ceiling before. But for the benefit of the new readers, I’ll do a quick update.
About three weeks ago, credit rating agency Fitch threatened the U.S. that it would put the country’s sovereign debt rating on negative watch if the government fails to adjust their debt ceiling come August 2.
Tim Geithner shared Fitch’s sentiments. According to Geithner, the Congress must pass a new debt ceiling to prevent the U.S. from possibly defaulting on its debt. At that point in time, the government’s borrowing limit was already at a whopping 14.3 trillion (yes trillion, that’s not a mistake) U.S. dollars. The U.S. Treasury wanted another 2 trillion dollar increase.
Ah, good question young padawan.
A U.S. default would basically put the economy back into negative growth (and eventually recession). It would also create a wide-reaching case of fear in the global financial markets and result in huge losses in the stock markets with unwanted consequences. The U.S. is such a big country that a default would undermine the entire financial system.
Ironically, a default could actually be beneficial for the U.S. dollar as risk aversion leads to safe-haven buying. In fact, a quick look at the charts would indicate that these debt concerns (in combination of other global problems, of course) have already influenced safe-haven flows as early as now! Do you think this safe-haven rally could last or will the U.S. find a quick fix for its debt problems?