US debt crisis: Britain, Japan warn of disastrous consequences for global economy

Discussion in 'Indo Pacific & East Asia' started by Vyom, Aug 1, 2011.

  1. Vyom

    Vyom Seeker Elite Member

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    LONDON/TOKYO: British and Japanese officials warned on Sunday of disastrous consequences for the global economy if last-minute talks among lawmakers in Washington failed to agree on raising the U.S. borrowing limit and averting a debt default.

    Governments across the world fear that because of the key role of the U.S. dollar in global banking and trading systems, there could be severe instability when Asian financial markets reopen on Monday if a U.S. debt deal is not in sight by then.

    In Washington, Senate Minority LeaderMitch McConnell, the top Senate Republican who is playing a key role in the debt talks, said "we're very close" to a $3 trillion deal that would raise the debt ceiling while cutting the U.S. budget deficit.

    But a senior White House official warned that an agreement was "not there yet."

    "If they get this one wrong and there's a default -- we don't expect that, we think that they will sort this out -- but if that were to happen, it has consequences for every family and every business in this country and all across the world," saidDanny Alexander, Chief Secretary to the British Treasury.

    "I think in the end the politicians on Capitol Hill can see that the precipice they are looking over is one that they are going to step back from," Alexander told BBC television.

    "But it is something that would have a big effect on the global financial system and on the global economy, where the United States is one of our major trading partners, that could have really big implications for the United Kingdom."

    In Tokyo, sources familiar with Japan's international and monetary affairs said they were increasingly concerned that markets might be too optimistic about prospects for a lasting solution to the crisis.

    Japanese officials still hope Washington can strike a deal and if that proves impossible, will give priority to interest payments to international holders of U.S. Treasury debt to limit the immediate market impact, the sources said.

    But Tokyo's concern is that if the crisis drags on without a clear and long-term solution, markets may be thrown into turmoil in the same way that they suffered when U.S. investment bank Lehman Brothers collapsed in September 2008.

    "If there is a default, the impact on global markets will be huge," said one of the sources, who declined to be named because of the sensitivity of the matter.

    Another Japanese source said, "Nobody thought Washington would let Lehman collapse. But look what happened."

    U.S. lawmakers have set themselves a Tuesday deadline to reach agreement and the U.S. Treasury has said it will run out of borrowing room on that day, although analysts think the government may have enough cash to keep servicing its debt and paying its bills through the middle of this month.

    CHINA Britain is the third largest foreign holder of U.S. Treasury debt and Japan is the second largest. China is the biggest with well over $1 trillion invested in U.S. Treasuries; about two-thirds of its $3.2 trillion of foreign exchange reserves are estimated to be held in dollar assets.

    On Saturday the official People's Daily newspaper, the mouthpiece of the Chinese Communist Party, castigated the U.S. handling of the debt crisis in an editorial as "irresponsible" and "immoral".

    It said the U.S. democratic system was to blame for the "farce", claiming that "not a single representative has considered the world, and even U.S. national interests are being banished from the mind".

    On Friday a senior economic policymaker in the euro zone, who declined to be named, told Reuters he was optimistic Washington would solve the problem but expressed surprise and anger that U.S. politicians were "playing chicken" with an issue of such importance for the global economy.

    Euro zone leaders are struggling to control sovereign debt crises in several countries in their region, and the U.S. debt problem is making this more difficult by adding to upward pressure on the yields of government bonds in those weak states.

    If there is no U.S. debt deal by Monday morning, central banks around the world are expected to stand ready to provide emergency supplies of money to commercial banks in case the banks become too nervous to lend to each other.

    Japan's first defence will be to ensure that Japanese financial institutions have a sufficient supply of dollars, the sources in Tokyo indicated.

    The Bank of Japan believes Japanese commercial banks have sufficient dollar cushions but will use its dollar swap arrangement with other central banks to prevent a dollar squeeze in case of market turmoil.

    In late June, the U.S. Federal Reserve agreed to extend liquidity swap arrangements with other major central banks until Aug. 1, 2012.

    The Japanese central bank is also prepared to flood markets with yen through its open market operations in case interbank borrowing costs spike, BOJ officials say.

    In Europe, there were minor signs of strain in the money markets last week with some banks becoming unable to take out longer-term dollar loans, but the effect was small since banks still expected Washington would reach a deal.

    TheEuropean Central Bank already offers unlimited euro loans to banks in some of its money market operations as part of its response to past crises, and it could use that policy to cope with any market problems this week.

    A spokesman for the Swiss central bank said, "The Swiss National Bank is ready to react appropriately at any time to market disruptions."

    US debt crisis: Britain, Japan warn of disastrous consequences for global economy if no US debt deal
     
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  3. Vyom

    Vyom Seeker Elite Member

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    Smells like another major recession in the making.
     
  4. Tshering22

    Tshering22 Sikkimese Saber Senior Member

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    I wonder why is that going to happen. Japan's stagnation (barring tsunamis) continues to mystify me as to why is a country like them not growing despite record sales and other economic engagements all over the emerging countries around the globe? What is causing them to stay the same or even shrink?

    I think we must as BRICS push for that alternate global reserve currency...
     
  5. Yusuf

    Yusuf GUARDIAN Administrator

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    Dollar has been a "kutti cheez" for me all along as I import. The way dollar and rupee goes is sometimes against international trend of dollar vs other currencies. Import price will certainly go up for me as the dollar goes down because my principle will feel the pinch. Not sure if it will be offset by fall in dollar rupee rate. My principle increased it's price by 12% a few months back just because of dollar going down for them.

    I think the world has to start to think beyond the dollar.
     
  6. Armand2REP

    Armand2REP CHINI EXPERT Veteran Member

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    That's funny when the two worst major debtors in the world (Japan and UK) are warning about anyone else. :laugh:
     
  7. Vyom

    Vyom Seeker Elite Member

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    Be in no doubt that if the US defaults, we will see a major recession and a direct impact on India. Not immediately, but when the US starts extracting more from its businesses to pay off that default.

     
  8. Vyom

    Vyom Seeker Elite Member

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    WASHINGTON — President Obama and Congressional leaders of both parties said late Sunday that they had agreed to a framework for a budget deal that would cut trillions of dollars in federal spending over the next decade and clear the way for an increase in the government’s borrowing limit.

    With the health of the fragile economy hanging in the balance and financial markets watching closely, the leaders said they would present the compromise to their caucuses on Monday in hopes of enacting it before a Tuesday deadline to avert default.

    Even as the president was speaking from the White House on Sunday night, Speaker John A. Boehner was on a conference call with House Republicans, trying to sell them on the proposal he had signed off on only minutes before.

    Since he is likely to lose the most conservative elements of his rank and file, Mr. Boehner faces the task of framing the pact as friendly enough to Republican principles to win over a significant group of House Republicans without alienating Democrats he will need to push it over the top.

    President Obama, in a hastily called appearance with reporters that ended a day of uncertainty, said that the compromise would “allow us to avoid default and end the crisis that Washington imposed on the rest of America.”

    “It ensures also that we will not face this same kind of crisis again in six months, or eight months, or 12 months,” he said. “And it will begin to lift the cloud of debt and the cloud of uncertainty that hangs over our economy.”

    Just before Mr. Obama spoke on television, the two Senate leaders, Harry Reid and Mitch McConnell, took the floor to endorse the pact as well.

    “I am relieved to say that leaders from both parties have come together for the sake of our economy to reach a historic, bipartisan compromise that ends this dangerous standoff,” said Mr. Reid, the majority leader.

    The tentative agreement calls for at least $2.4 trillion in spending cuts over 10 years, a new Congressional committee to recommend a deficit-reduction proposal by Thanksgiving, and a two-step increase in the debt ceiling.

    The announcement concluded a tumultuous 24 hours that saw hopes rise Saturday night over the prospect of a deal that might have concluded the budget stalemate. By Sunday, worry set in again as lawmakers and White House officials struggled to hammer out the fine points of an agreement that must clear a Senate controlled by Democrats as well as the Republican House.

    If the deal is approved, establishing a special joint committee to explore deficit reduction, it will ensure that the size and scope of the federal government and the tension between spending and taxes will remain front and center in the Washington debate headed into the 2012 election.

    Markets reacted favorably to the announcement, with Asian markets jumping on news of the deal. The Nikkei was up nearly 2 percent in late-morning trading; the dollar rose against the Japanese yen.

    President Obama tempered his comments by noting that “there are still some very important votes to be taken” and that winning House approval would be a particular challenge.

    On the conference call, Mr. Boehner sought to portray the new agreement as one heavily tilted toward the Republican call for no new revenue, and he said it met the goal of instituting cuts greater than the amount of the debt limit increase. In a presentation, he said the pact would prevent a “job-killing default” — a warning to lawmakers that failure to raise the limit could add to the bleak employment picture.

    “Our framework is now on the table that will end this crisis in a manner that meets our principles of smaller government,” said Mr. Boehner, who said he hoped to get the legislation onto the House floor as quickly as possible. Participants on the call, which lasted about an hour, said that the tone was cordial and that lawmakers expressed less resistance than had been anticipated.

    At the same time, Representative Nancy Pelosi of California, the former speaker and current Democratic leader, was noncommittal about the plan, suggesting that Democrats might not rally behind it. “I look forward to reviewing the legislation with my caucus to see what level of support we can provide,” she said in a written statement.

    Obama and Leaders Reach Debt Deal
     
  9. sandeepdg

    sandeepdg Senior Member Senior Member

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    Well, this situation was inevitable for the US, since you can't continue running the world biggest economy solely on the promise of debt forever. So, the fools in White House clearly lacked a vision !
     
    panduranghari likes this.
  10. panduranghari

    panduranghari Senior Member Senior Member

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    Yes it started in 1952 and its foundation was laid in 1957 by Rome Accords, its ratification by Mastricht treaty ensured it was born. Yes world has always thought beyond dollar and even today there is a pretender in waiting to take up the position of dollar.
     

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