Failure to reach a bipartisan agreement over the federal debt ceiling of the world’s largest economy would be “catastrophic” and trigger a “worldwide crisis,” global financial leaders warned.
Korea would not be an exception to this emerging scenario as the deadline to the debt limit negotiations looms large this week with no clear signs of the two parties securing a deal in sight, analysts said.
Although the U.S. has never defaulted on its debt over the last 224 years of its history, failing to raise the debt ceiling would cause a negative chain reaction severely affecting not only the financial markets but every household and business.
“It points to the potentially catastrophic impacts of default, including credit market disruptions, a significant loss in the value of the dollar, markedly elevated U.S. interest rates, negative spillover effects to the global economy, and real risk of a financial crisis and recession that could echo the events of 2008 or worse,” said U.S. Treasury Secretary Jack Lew before the Senate Finance Committee.
Secretary Lew noted that even an “extended” talk over the debt limit would send the wrong signal to the world that could further increase risks of an interest rate rise on bonds as it would hurt confidence over the world’s largest economy.
This potential devastation would lead the U.S. and other closely linked economies into global depression.
“We need to look no further than 2011 for evidence of what just an extended debate on the merits of raising the debt limit can do to our economy,” Lew said.
“In 2011, U.S. government debt was downgraded for the first time in history, the stock market fell, measures of volatility jumped, and credit risk spreads widened noticeably; these financial market effects persisted for months.”
Chiefs of the International Monetary Fund and the World Bank also warned of “dangers” if the U.S. fails to raise the ceiling by this Thursday.
IMF managing director Christine Lagarde said in an interview with the U.S. press that it would result in “massive disruption” globally, while World Bank chief Jim Yong Kim said failing to raise the debt ceiling would be “disastrous” for the world, especially developing economies.
Korea, which is already exposed to the lingering U.S. government shutdown and impending monetary stimulus cuts, would be further adversely affected by the potential outcome from the failure to raise the debt limit.
The Finance Ministry said these various factors will “increase global market volatility and could further ignite capital outflow from emerging markets.”
The Bank of Korea recently revised its 2014 growth outlook for the Korean economy down to 3.8 percent from its initial forecast of 4.0 percent as growing external uncertainties stemming from the shutdown and debt-ceiling woes in the U.S. far outweighed Korea’s expectations of a solid recovery next year.
By Park Hyong-ki (
hkp@heraldcorp.com)
