US Debt Default Catastrophic, Spillover would reverberate around the world

[Indo-guy]

US debt default 'catastrophic', spillover could reverberate around the world: Obama govt - The Times of India


WASHINGTON: The Obama administration said the US economy could fall into its deepest crisis since the Great Depression if US Congress does not raise a cap on government borrowing soon and warned it would be impossible to prioritize debt payments over other obligations.

In a report released on Thursday, the Treasury Department said a US debt default could force up borrowing costs, weaken investment and curb growth. This could inflict damage on the economy that could last for longer than a generation.

"A default would be unprecedented and has the potential to be catastrophic," Treasury said.



"The negative spillovers could reverberate around the world, and there might be a financial crisis and recession that could echo the events of 2008 or worse."

A standoff over financing, prompted by Republicans' determination to halt US President Barack Obama's healthcare reforms, has already shut down sections of the government.

But analysts warn the economic mayhem would be even greater if the shutdown merges with a more complex fight looming later this month over raising the federal debt limit, which could cause the United States to miss debt payments.

A senior Treasury official told journalists that favoring bills to creditors over others would be unworkable and the administration was completely opposed to this approach.

Some Republicans on Capitol Hill support a plan for the Treasury to prioritize debt payments, as many economists believe a missed payment on government debt could trigger a devastating rout in global markets.

Indeed, analysts have generally believed the Treasury would at least try to prioritize debt payments over other spending on other programs.

The Treasury expects to exhaust its ability to borrow under the nation's $16.7 trillion debt ceiling by Oct. 17, at which point the government would be down to its last $30 billion, in addition to new incoming revenues.

The Congressional Budget Office expects the nation could start defaulting on obligations between Oct. 22 and the end of the month. Large debt payments loom on Oct. 24 and Oct. 31.

U.S. Treasury debt, long deemed risk-free, is the foundation of the global financial system. Assets around the world use U.S. Treasuries as a benchmark for their value.

 

[[Bregs]]

If this happened markets blood bath in Mumbai will follow

 

[Indo-guy]

If this happened markets blood bath in Mumbai will follow

there will be bloodbath worldwide !

US is the crux of the global economy !!! all countries will be affected ,more so India !!!



http://www.reuters.com/article/2013/10/03/us-usa-fiscal-treasury-idUSBRE9920KA20131003



WASHINGTON | Thu Oct 3, 2013 11:24am EDT

(Reuters) - The Obama administration said the U.S. economy could fall into its deepest crisis since the Great Depression if Congress does not raise a cap on government borrowing soon and warned it would be impossible to prioritize debt payments over other obligations.

In a report released on Thursday, the Treasury Department said a U.S. debt default could force up borrowing costs, weaken investment and curb growth. This could inflict damage on the economy that could last for longer than a generation.

"A default would be unprecedented and has the potential to be catastrophic," Treasury said.

"The negative spillovers could reverberate around the world, and there might be a financial crisis and recession that could echo the events of 2008 or worse."

A standoff over financing, prompted by Republicans' determination to halt President Barack Obama's healthcare reforms, has already shut down sections of the government.

But analysts warn the economic mayhem would be even greater if the shutdown merges with a more complex fight looming later this month over raising the federal debt limit, which could cause the United States to miss debt payments.

A senior Treasury official told journalists that favoring bills to creditors over others would be unworkable and the administration was completely opposed to this approach.

Some Republicans on Capitol Hill support a plan for the Treasury to prioritize debt payments, as many economists believe a missed payment on government debt could trigger a devastating rout in global markets.

Indeed, analysts have generally believed the Treasury would at least try to prioritize debt payments over other spending on other programs.

The Treasury expects to exhaust its ability to borrow under the nation's $16.7 trillion debt ceiling by October 17, at which point the government would be down to its last $30 billion, in addition to new incoming revenues.

The Congressional Budget Office expects the nation could start defaulting on obligations between October 22 and the end of the month. Large debt payments loom on October 24 and October 31.

U.S. Treasury debt, long deemed risk-free, is the foundation of the global financial system. Assets around the world use U.S. Treasuries as a benchmark for their value.

(Reporting by Jason Lange and Alister Bull; Editing by Krista Hughes)

 

[Indo-guy]

Treasury Says U.S. Default Potentially 'Catastrophic' | Fox Business





The Treasury Department said Thursday that a default by the U.S. on its debt caused by the ongoing budget standoff in Congress could have a “catastrophic” effect on the U.S. economy.

Given the already fragile state of the economy, the Treasury Department said in a report that default by the U.S. and its ripple effect through the global economy could lead to frozen credit markets, a plunge in the value of the dollar, skyrocketing interest rates, all of which could instigate a financial crisis mirroring that of 2008 “or worse.”

Congressional Republicans and Democrats are stuck in a stalemate over the 2014 budget, one that has helped lead to the first government shutdown in 17 years. That battle is widely expected to extend into the debate over a vote to raise the debt limit, which Treasury has said must be increased by mid-October or the U.S. will run out of money to pay its debts.

A similar standoff in the summer of 2011 prompted ratings firm Standard & Poor’s to lower the U.S. credit rating, an unprecedented event that roiled securities markets for weeks.

The Treasury report referenced the fallout from that 2011 stalemate, which ended in a compromise that delayed actual spending cuts, suggesting that another impasse would negatively impact consumer and small business confidence, stock price volatility, credit risk spreads and mortgages.

Government Shutdown Could Exacerbate Situation

“As we saw two years ago, prolonged uncertainty over whether our nation will pay its bills in full and on time hurts our economy," Treasury Secretary Jack Lew said in a statement released with the report. “Postponing a debt ceiling increase to the very last minute is exactly what our economy does not need – a self-inflicted wound harming families and businesses. Our nation has worked hard to recover from the 2008 financial crisis, and Congress must act now to lift the debt ceiling before that recovery is put in jeopardy."

The report goes on to cite the various ways even the threat of a default could harm U.S. consumers and businesses: sharp declines in household wealth, an increase in the cost of borrowing for businesses and households, and a decline in private sector confidence, all of which would further hamper the sluggish economic recovery.

And the ongoing partial government shutdown, which has furloughed more than 800,000 federal employees since Tuesday, will only exacerbate the situation, the report says, as those employees scale back on spending, belt tightening that will have a domino effect in areas where large numbers of federal workers aren’t getting paid.

Also Thursday, International Monetary Fund chief Christine Lagarde said failure to raise the U.S. debt ceiling could damage not only the United States but the rest of the global economy.

"It is 'mission-critical' that this be resolved as soon as possible," she said in a speech in Washington, ahead of the IMF and World Bank annual meetings next week, according to Reuters.

Lagarde said growth in the U.S. has already been hurt by too much fiscal consolidation – the across-the-board federal cuts known as sequestration that took effect in March -- and will be below 2 percent this year before rising by about 1 percentage point in 2014.

Recession Worse than Any Since the Great Depression

Banking analyst Dick Bove is also predicting dire consequences if Congress fails to reach an agreement on the debt ceiling.

“It is my strong belief that a true default by the United States Treasury would wipe out bank equity. All bank lending to the private sector in the United States would stop, immediately. Existing loans would not be rolled over. Immediate repayment would be demanded,” Bove said in a report issued Thursday.

Bove echoed the predictions of Lew and Lagarde that a default – even the real threat of default – could have an overwhelming global impact. In short, the analyst believes a default could lead to a global depression.

“The devastation to the United States would be so severe that it would take decades to recover from the Depression caused by a default and the attendant dumping of trillions of dollars of U.S. Treasury securities on the global financial markets,” Bove said.

The Treasury report said the 2011 standoff left “long-lasting scars” on financial markets and caused stress that lasted for “many months.”

The report concluded: “In the event of a default, the U.S. economy could be plunged into a recession worse than any seen since the Great Depression. The U.S. dollar and Treasury securities are at the center of the international finance system. In the catastrophic event that a debt limit impasse were to lead to a default on Treasury securities, financial markets could be shaken to their core as was seen in late 2008, which resulted in a recession worse than any seen since the Great Depression.

 

[Indo-guy]

Secretary Lew Warns Of Dangers Of Debt Limit Delay In Speech To The Economic Club Of Washington


Secretary Lew Warns Of Dangers Of Debt Limit Delay In Speech To The Economic Club Of Washington
By: Brandi Hoffine 9/18/2013
Page Content
Recalling the damage caused in 2011 by the drawn-out debate in Congress over raising the nation’s debt limit, Secretary Lew cautioned that repeating the same mistake this time around could once again disrupt financial markets and roll back economic progress. In remarks to The Economic Club of Washington​, D.C. yesterday, Lew warned that the 2011 debate fundamentally changed the stakes as leaders in Congress – for the first time ever - held a debate “over whether the United States should voluntarily default on its obligations.” Though Congress ultimately raised the debt limit, Lew noted that the brinksmanship “led to business uncertainty, a drop in consumer confidence, and the first ever downgrade of the nation’s AAA credit rating.”

We reached the debt ceiling in May. Since that time, Treasury has used what are called extraordinary measures to avoid defaulting on our obligations, and Secretary Lew has made clear that such measures will be exhausted by mid-October:

Lew: Once you hit the end of extraordinary measures your borrowing authority is gone. You have no more ability to borrow and you're then left with cash. As any small business person knows, if you're operating your business relying on cash in the cash box to pay your daily bills, if your revenue is not adequate on a given day and you empty the cash box, you can't pay all your bills when the cash box is empty. I can't say with precision when that is but I can tell you I can't refill the cash box once we've lost our ability to use extraordinary measures. That is going to happen in mid-October.

In his remarks, the Secretary cautioned against relying on unworkable approaches like "prioritization," which would force impossible choices in paying the government's bills like whether to pay seniors or veterans the benefits they are owed.

“As administrations of both political parties have previously determined: these 'prioritization' proposals are unworkable. They represent an irresponsible retreat from a core American value: Since 1789, regardless of party, Presidents and Congress have always honored all of our commitments,” Lew told the room of business leaders.

Take a moment to watch Secretary Lew explain why the nation’s credit should never be up for negotiation:





Chromeless Video Player

 

[[Bregs]]

very bad news for emerging economies

 

[Indo-guy]

US govt shutdown no big deal, a bigger crisis awaits | Firstpost


Starting today nearly 800,000 of the 2.1 million people that work directly for the government of the United States of America, have been asked to go on an unpaid leave, leading to non essential services from national parks to museums to libraries being shut down temporarily. The call centres of the Internal Revenue Service (IRS or the equivalent of the income tax department in India) won’t work and nearly 90% of the workers of the Environmental Protection Agency, won’t be at work either. NASA or the National Aeronautics and Space Administration has also more or less been shut down, except its mission control centre at Houston, Texas. Services like rubbish collection and street cleaning stand suspended as well.

Nearly a million workers have been asked to work without pay. This will ensure the continuation of essential services like military, postal service and police. Airport security and air traffic control will also carry on their work as usual.

So what is happening here? The US budget year ends on September 30 every year. A ‘shutdown’ comes into the picture when the American Congress (the equivalent of what we call the Parliament in India) does not pass appropriation bills to fund the ‘discretionary’ spending programmes. The discretionary spending programmes need to be funded every year.

As Matthew Yglesias writes on Politics, Business, Technology, and the Arts, “Discretionary spending…is money that Congress appropriates on what’s traditionally been an annual cycle. A law is passed saying that such-and-such agency has X amount of money to spend over such-and-such amount of time on this or that.” What is not categorised as discretionary spending is ‘mandatory’ spending. This includes social security, medicare (a form of medical insurance) and some farm subsidies. This spending continues as usual.


The two houses of the American Congress are currently in a logjam. The House of Representatives is dominated by the Republican Party and the Senate is dominated by the Democratic Party. The Republicans want the Affordable Care Act (better known as Obamacare, and an Act which aims to improve the quality of health insurance, at the same time making it more affordable ) to be pushed forward by a period of one year. They have made this a condition for passing a temporary budget to fund the ‘discretionary’ spending of government.

The Democrats on the other hand are in no mood to relent given that the Affordable Care Act is something that President Barack Obama has been closely associated with. Hence, the two political parties have been at loggerheads. As Yglesias writes, “When the parties in Congress can’t come together on appropriations bills, they often pass what’s known as a continuing resolution that essentially instructs the government to extend the last appropriations bill forward in time…House Republicans keep writing new continuing resolutions that fund the government while simultaneously delaying or repealing key elements of the Affordable Care Act. Senate Democrats keep taking those provisions out and sending the “clean” continuing resolution back to the House. In absence of a continuing resolution, the discretionary portions of the federal government lack funding to continue their work and the government goes into “shutdown.”

With no money coming in, the non-essential services are being shutdown. As The New York Times reports, “The Office of Management and Budget issued orders that “agencies should now execute plans for an orderly shutdown due to the absence of appropriations” because Congress had failed to act to keep the federal government financed.”

The shutdown will impact the American economy depending on how long it continues. Estimates made Goldman Sachs suggest that a two day shutdown could slowdown the economic growth rate during the period October-December 2013 by 0.1%. A longer shutdown of a week could shave of 0.3% from the economic growth.

Nevertheless, the American government partially shutting down should not be seen as a big worry. The bigger worry is set to come on October 17, later this month. On that day the American government is expected to hit its debt ceiling. The American government spends more than what it earns. In order to make up for the difference it sells bonds and takes on debt. There is a maximum amount of debt that it is allowed to take on, and which currently stands at $16.69 trillion. This limit is likely to be exhausted by October 17, 2013.

If the debt ceiling is not raised the American government will have to stop borrowing and start cutting its expenditure. As Eric Posner writes on Slate.com, “If the debt ceiling is not raised, and the executive branch stops borrowing, the government will need to cut spending by about 15 to 20 percent—or almost 40 percent of spending on everything (yes, Medicare and defense) other than the interest on the debt.”

The impact of the cut in expenditure will be immediate. As Henry J Aaron writes in The New York Times ,“A decision to cut spending enough to avoid borrowing would instantaneously slash outlays by approximately $600 billion a year. Cutting payments to veterans, Social Security benefits and interest on the national debt by half would just about do the job. But such cuts would not only illegally betray promises to veterans, the elderly and disabled and bondholders.”

Also, the American government has reached a stage where it pays the interest on past debt by selling new bonds and taking on more debt. Any decision to stop paying interest on bonds will lead to a global financial crisis. As Posner writes “If he (i.e Obama) stops interest payments, the United States will default. This will not only raise interest payments—costing taxpayers hundreds of billions of dollars—but could spark a financial panic like the meltdown of 2008.”

If this situation arises, there is not much that President Obama will be able to do. He will basically have three options. “One is President Obama could decide that the government’s legal obligation to spend (and certain elements of the 14thAmendment) trump the statutory debt ceiling, and just order the Treasury to sell more bonds. The second option is Obama could instruct the Treasury to pay some of the government’s bills and just not pay the rest. The third option is to pay nobody. All three of these options face the same basic problem of seeming to be illegal. (The second one also faces the problem that Treasury says it lacks the logistical capacity to do it),” writes Yglesias.

Also, there are no legal provisions to decide which expenditure should be cut first. “There is no clear legal basis for deciding what programs to cut. Defense contractors, or Medicare payments to doctors? Education grants, or the F.B.I.? Endless litigation would follow. No matter how the cuts might be distributed, they would, if sustained for more than a very brief period, kill the economic recovery and cause unemployment to return quickly to double digits,” Aaron points out.

Given this, the Republicans and the Democrats need to start talking pretty soon, or we will have another crisis on our hands pretty soon.

Vivek Kaul is a writer. He tweets @kaul_vivek

 

[Indo-guy]

US Treasury Press Release



Report: The Potential Macroeconomic Effect of Debt Ceiling Brinksmanship



Report: The Potential Macroeconomic Effect of Debt Ceiling Brinksmanship

10/3/2013 Page Content​

Unprecedented default could result in recession comparable to or worse than 2008 financial crisis

WASHINGTON - The U.S. Department of the Treasury released a report today on the potential macroeconomic effects of debt ceiling brinksmanship. The report states that a default would be unprecedented and has the potential to be catastrophic: credit markets could freeze, the value of the dollar could plummet, and U.S. interest rates could skyrocket, potentially resulting in a financial crisis and recession that could echo the events of 2008 or worse. By looking at the disruptions to financial markets that ensued in 2011, the report examines a variety of economic indicators – including consumer and small business confidence, stock price volatility, credit risk spreads, and mortgage spreads – through which a similar episode might harm the economic expansion.

"As we saw two years ago, prolonged uncertainty over whether our nation will pay its bills in full and on time hurts our economy," Treasury Secretary Jacob J. Lew said. “Postponing a debt ceiling increase to the very last minute is exactly what our economy does not need – a self-inflicted wound harming families and businesses. Our nation has worked hard to recover from the 2008 financial crisis, and Congress must act now to lift the debt ceiling before that recovery is put in jeopardy."

The report notes that even the possibility of a default could roil financial markets and damage the economy, thereby harming American businesses and households. Sharp declines in household wealth, increases in the cost of financing for businesses and households, and a fall in private-sector confidence, all tend to undermine economic expansion. It also states that if the current government shutdown is protracted, it could make the U.S. economy even more susceptible to the adverse effects from a debt ceiling impasse than it was prior to the shutdown.

Key Findings of the Report Include:

· The debt ceiling impasse in 2011 contributed to long-lasting scars on financial markets. The financial markets stress that developed in August of 2011 persisted for many months. Then, as now, the economic expansion was vulnerable to adverse shocks.

· Even the possibility of a default could lead to sharp declines in household wealth, increases in the cost of financing for businesses and households, and a fall in private-sector confidence.

· Sharp declines in household wealth. Wealth is an important determinant of household consumption spending, and consumption spending accounts for about 70 percent of GDP. From the second to the third quarter of 2011, household consumption fell $2.4 trillion.

· Increases in the cost of financing for businesses and households. Increases in perceived risk and investor risk aversion mean that investors will demand a higher return on money lent. That higher return implies higher costs of borrowing for households and businesses, which results in lower consumption and investment spending and less hiring. The 30-year conventional fixed-rate mortgage spread over Treasury yields jumped by as much as 70 basis points late in the summer of 2011. In the summer of 2011, the BBB credit spread jumped 56 basis points.

· A fall in private-sector confidence. Consumer and business confidence were falling in 2011, and as the debate about the debt limit progressed, business and household confidence fell to levels that are typically only seen during recessions. It took months before confidence recovered, even though, ultimately, there was no default.

· In the event of a default, the U.S. economy could be plunged into a recession worse than any seen since the Great Depression. The U.S. dollar and Treasury securities are at the center of the international finance system. In the catastrophic event that a debt limit impasse were to lead to a default on Treasury securities, financial markets could be shaken to their core as was seen in late 2008, which resulted in a recession worse than any seen since the Great Depression.

Additionally, there may be tentative signs that the current debate is affecting financial markets. Although the price moves are small and could easily reverse quickly, the fact that yields on Treasury bills that mature at the end of October are higher than bills that mature immediately before or after might suggest nascent concerns about possible delays in payments on those bills. If market participants were to lose confidence in the United States’ willingness to repay its debts, the adverse effects seen in 2011 could reappear, and even push up yields on Treasury securities. Such a rise in Treasury yields would also raise the cost of financing the government’s debt and worsen the fiscal position of the government.


http://www.treasury.gov/initiatives...NOMIC IMPACT OF DEBT CEILING BRINKMANSHIP.pdf

 

[Lightningbolt]

End of the Yankees is near

 

[KRAIT]

India won't go nuclear first, even against Pakistan. We built conventional strength just to avoid it.

And we are more focused in development.

 

[elis]

Time to invade JEW USA to erase the debt

 

[Ghulam-Alazhar]

Time to invade JEW USA to erase the debt

@elis
Hi elis how are u?Please pm me I have to talk 2 u

 

[Ghulam-Alazhar]

Time to invade JEW USA to erase the debt

Which army will invade USA and end it?!??

 

[JayAtl]

Which army will invade USA and end it?!??

ellis and his merry band of N__ Jobs

 

[Ghulam-Alazhar]

ellis and his merry band of N__ Jobs

What does he/she think with such as these posts?