U.S. default risk jangles nerves around globe

  • Article by: STEVEN ERLANGER , New York Times
  • Updated: October 7, 2013 - 9:48 PM

Nations worry that U.S. budget standoff endangers economies.

– The bitter fiscal stalemate in Washington is producing nervous ripples from London to Bali, with increasing anxiety that the United States might actually default on a portion of its government debt, set off global financial troubles and undercut fragile economic recoveries in many countries.

Five years after the financial crisis in the United States helped spread a deep global recession, policymakers around the world again fear collateral damage, this time with their nations becoming victims not of Wall Street’s excesses but of a political system in Washington that to many foreign eyes no longer seems to be able to function efficiently.

There is plenty of evidence that the United States remains engaged globally on many levels, with the dual commando raids on targets in Africa this weekend the most recent. But the partial shutdown of the government has shown again that Washington’s problems extend beyond U.S. borders. Effectively grounded by the political crisis at home, President Obama was absent from a summit meeting of Pacific Rim leaders in Indonesia on Monday, giving China greater opportunity to highlight its role in the region.

One of the attendees, President Vladimir Putin of Russia, provided a possibly sardonic statement of sympathy for Obama. “We see what is happening in U.S. domestic politics and this is not an easy situation,” Putin said, adding, “If I was in his situation, I would not come, either.”

Precursor to fallout

In Europe, the effort to reach a big new trade accord with the United States is at a standstill, with many government agencies in Washington operating with skeletal staffs. And as worrisome as that kind of delay is in Europe, it is only a precursor to the almost certain economic fallout if the United States does not raise the debt limit and defaults for the first time on government securities.

Foreigners often complain, usually with some forbearance, that the United States is so powerful that its president is in some important sense their president, too. They, however, lack the opportunity to cast a vote.

There is not much that any foreigner can do about Obama’s confrontation with House Speaker John Boehner, who said Sunday that his Republican members would not accept a clean bill — one with no conditions — that would raise the American debt limit before the government hits its borrowing limit and risks technical default as soon as next week. At the same time, Boehner has told colleagues privately that he would avert a default, but whether he actually has the ability to do so remains uncertain.

“The international community is asking, ‘Does the U.S. still have the will to act?’ ” said Xenia Dormandy, a senior fellow at London’s Chatham House and a former American official in the State Department and the National Security Council under President George W. Bush.

“Both the Syria vote and the current budget crisis are nerve-racking for the world,” she said, referring to Obama’s sudden decision to ask Congress to authorize a strike on Syria and then changing his mind.

Anxiety across Europe

Said Alain Frachon, a columnist and former Washington correspondent for the French newspaper Le Monde: “Washington is looking more like the Italian political system, with its permanent crises, and not a presidential system, as before.”

The anxiety is all over Europe, he said, and it comes just as Greece and Spain seem to be turning around, as there are spurts of growth that promise an end to recession, and as Germany has gotten through its elections and Italy through another political crisis. Another financial meltdown would hurt France, too, he said, and not just Greece, Portugal and Spain.

“People don’t want to see all this fragile equilibrium destabilized by a possible financial crisis provoked in Washington,” he said.

Jean-Paul Fitoussi, an economist at the Institut d’tudes Politiques de Paris, said a default would slow the U.S. economy and depreciate the dollar, “so it would lead to a loss of competitiveness in Europe at the very moment when all policies in Europe are aimed at increasing competitiveness, and that would be very bad news.”

Perhaps worse, he said, is that “the banking system in Europe remains fragile, so more bad news could have unforeseen consequences on the world’s financial system.”

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