The Debt Limit Imbroglio
We foreigners are getting very nervous about the debt limit impasse in the US. Until last week media pundits and financial analysts evinced a "Of course, both sides will compromise in the end" optimism. This seemed a perfectly reasonable assumption since the debt limit had been raised 106 times since 1940, including 18 times under Ronald Reagan and 7 times under George Bush - so the Republicans had form on this one. And it is the GOP that gets the blame overseas for the imbroglio - just this weekend Vince Cable, Business Secretary in the UK Conservative-Liberal Democrat Coalition Government, said on national television that the culprits were a bunch of "right wing nutters" (his phrase, not mine). In the last few days, however, there is a palpable shift over here to confronting the worst-case scenario, even though the betting is still on a last minute deal. Both The Guardian and Financial Times are devoting a lot of coverage to what might happen if there's a default. The fact that UK 10-year government bonds now have a 0.02 percent lower yield than US treasuries is seen as a significant indicator of what Deutsche Bank analysts have called a flight to quality. Contrary to the conservative Republican/Tea Party belief that there will be no severe consequences if the debt limit is not changed, the sense over here is that the adverse effects will be considerable. Many financial analysts are anticipating a credit downgrade for the US that could lead to a sell-off of US treasury bonds that would lead in turn to a general tightening of US credit markets. It's ironic as one of the rationales for the Republican refusal to raise taxes as part of a deficit reduction/debt limitation deal is not to hurt the economy. A debt default would likely have a worse effect in that regard, however. It still seems inconceivable that this will happen, but not impossible. My favourite quote in today's newspapers comes from Nils Pratley in The Guardian. "To European minds, one element of any plan to tackle the US's debt woes seems obvious - higher taxes for the corporate sector and the rich, who have prospered mightily during two decades of debt-financed growth." Maybe - but it's going to take a shift in the political culture of some magnitude to get to that point of rationality.
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