As wrangling in the U.S. Congress continues over the debt ceiling, with Republicans insisting that a taste of default could force the White House to cut spending, the rest of the world looks on in growing horror at the prospect.
Reuters reported Wednesday that government officials all over the world, as well as large creditor nations like China, are viewing the possibility as a potential disaster the more likely it gets. On Tuesday it reported that mainstream Republicans, dismissing the idea that such a move could trigger a financial catastrophe, are beginning to espouse the idea of a technical default as a means of forcing spending cuts.
While ratings agencies such as Moody's have warned of dire consequences and Wall Street has chimed in as well, the idea seems to be gathering steam, with the notion of disaster dismissed by Republicans. Countries around the world, however, particularly heavy investors in U.S. debt, are not so sanguine.
An official at India's central bank was quoted in the report saying, "How can the U.S. be allowed to default? We don't think this is a possibility because this could then create huge panic globally." India, which holds some $39.8 billion in U.S. Treasuries as of March, says it has not much choice regarding its investments, since U.S. debt is still considered one of the safest and most liquid. That could change if the debt limit was not raised.
Ben Westmore, a commodities economist at National Australia Bank, was quoted saying, "It has dire implications for the economy at a time when the macro data is softening. It's just a horrible idea." Marc Ostwald, a strategist with Monument Securities in London, said the possibility was "frightening" and pointed out that bondholders would lose patience if Congress did not stop tossing about the possibility in the weeks to come. "This isn't a debate, this is like a Mexican standoff and that is where the problem lies," he said in the report.
