Governments warn of disaster if no debt deal
There is a great risk of financial disaster if Washington fails to raise the ceiling of US debt. This is warning that governments and policy makers around the world are making.
While haggling is done by Congress over a deal to stave off an unprecedented US default, households could across the globe could be hurt from such failure.
“The world is watching the United States with trepidation, with anxiety, with concern, but also with hope,” said Christine Lagarde, International Monetary Fund Managing Director.
She added that “Instability is never a good idea, never a good idea. And this level of uncertainty, the trepidation arising from Aug. 2, is bringing about a lot of instability.”
By Tuesday, the US Democrats and Republicans should already reach a decision since according to the US Treasury, it will run out of borrowing room on that day. However, according to analysts, the US Treasury will actually have enough cash to service its debts and bills throughout the middle of the month.
Confidence in the US has been expressed by the German Central Bank.
A senate vote is expected to be held on Sunday according to US Senate Leader Harry Reid on an emerging deal to raise the debt ceiling.
Investors are relieved based on the progress signs and the strengthening of the US dollar against the Japanese Yen. This happened after financial markets opened up for the week in Asia.
“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,” said Chief Secretary to the British Treasury, Danny Alexander.
“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,” he added.
Japan
Japan is concerned that the people are becoming too hopeful regarding prospects for a lasting solution to the crisis. It is concerned that markets may be thrown into turmoil just like what happened when US investment bank Lehman Brothers collapsed in 2008.
“Nobody thought Washington would let Lehman collapse. But look what happened,” said a Japanese source.
China
China itself has expressed alarm despite owning over US$1 trillion in US treasury bonds.
The People’s Daily newspaper has branded the way the crisis has been handled as “irresponsible and immoral”.
It said that the US democratic system is to blame for the “farce,” and claims that “not a single representative has considered the world, and even US national interests are being banished from the mind”.
Should the banks become afraid to lend money to each other, the central banks around the world will be ready to provide emergency money supplies to commercial banks.
Japan’s defense is to ensure that a sufficient supply of dollars is available in Japanese financial institutions.
BOJ officials say that the Japanese central bank is prepared to flood with yen the markets with its open market operations in the event interbank borrowing spikes.
The US Federal Reserve has extended liquidity swap arrangement last June with other big central banks until August 1, 2011.
There were banks in Europe that were unable to take out longer-term dollar loans.
Meanwhile, unlimited euro loans to banks may be provided by the European Central Bank in some of its money market operations as part of its response to crises.
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Source : WATODAY.COM.AU
