The political deadlock in Washington on whether and how to increase the United States’ debt limit is causing anxiety over a possible default and over a new global economic downturn.
The deepening of the Eurozone debt crisis last week through contagion spreading to Italy was more than matched by the growing chance that the United States government would not be able to pay its bills or service its debts starting 2 August.
Week-long negotiations took place between the US President, and the Democrat and Republican party leaders to avert a partial closing down of the federal government.
The US presently has a limit to its federal debt of $14.29 trillion. This limit will be reached by 2 August. Congress has to approve raising this limit before then, or else the Administration will have to postpone meeting some of its financial commitments.
The Federal Reserve chairman Ben Bernanke warned that default would send shockwaves throughout the global economy.
The alarm bells rang even louder when two rating agencies, Moody’s and Standard and Poor, warned they might downgrade US debt from its AAA status if the political impasse continues.
There are several reasons why the world, and especially the developing countries, should be alarmed at this situation.