Facing Debtgeddon

EXTRACT: Yet the clock is ticking, and if an agreement to raise the US debt limit - or some other sort of deal - is not reached by August 2, then the US will suffer a catastrophic default and the US treasury will run out of money to pay ‘non-essential’ bills and wages (schools, parks, libraries, etc). An occurrence that would have seemed unimaginable only a few months ago. Such a default would lead to interest rate rises and, disastrously, the possible downgrading of the US’s triple-A status with the credit rating agencies - according to Standard and Poor, there is a “50-50 chance” of that happening over the next few months. Such an eventuality could send the entire US economy into a deep recession, and would set off an almost immediate global chain reaction effect: it could even herald an unprecedented economic slump. Thanks to the dual debt crisis, we are now facing what some have called ‘eurogeddon’ and ‘dollargeddon’. They might not be exaggerating.
In which case, British chancellor George Osborne can wave goodbye to his ‘recovery’ plans - already turning to dust. The preliminary GDP estimate for April to June showed the economy growing by a mere 0.2%. Although this was slightly better than some of the gloomier forecasts, it is rather lower than the 0.5% growth seen in the first quarter, which came after a 0.5% decline in the fourth quarter of last year. Rather unpersuasively, to put it mildly, the Office for National Statistics attributed some of the “weakening in growth” to a range of one-off events: the royal wedding, the additional bank holiday, the unusually warm April, the impact of the Japanese tsunami on global supply chains ... Excuses, excuses - not for nothing has Ed Balls, the shadow chancellor, accused Osborne and the government of being in a state of “total denial” about the economy.
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Contagion Spreads To The Core

EXTRACT: Therefore, as the deadline approaches like the grim reaper, the very financial credibility - and credit-worthiness - of the US government is at stake. Incredibly, this conjures up the possibility that the US itself might be downgraded by the credit agencies, wielding their apparently god-like powers. Not that that long ago, this would have seemed like economic science fiction. But Priya Misra of Bank of America Merrill Lynch has warned that the market reaction to any sort of default - even if it was only a temporary one - would be “drastic”; indeed, that the US “may also lose one of its most valuable assets, the safe haven nature of US treasuries, which could structurally pressure bond rates higher”. The risk, however small, of a default pushed Moody’s on July 13 to downgrade the outlook on its triple-A rating of US sovereign debt to “negative”. Standard & Poor followed the next day, declaring that it was so “unimpressed” by the longer-term budget negotiations that there was a “50-50 chance” of the US losing its triple-A status over the next three months.
The downward spiral of the dual debt crisis in both the euro zone and the US has the potential to reproduce the 2007-08 crisis, but at an even higher level: ruination stares us in the face. Some imagine, or dream, that China - with its 9.5% annual growth for the second quarter - will come to the rescue of capitalism like Superman - or at least act as a “circuit breaker”. More like a pipe-dream.
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