MANILA, Philippines - With pressure mounting and little progress on the fast-approaching debt ceiling deadline, Finance Secretary Cesar Purisima has called on America’s deadlocked lawmakers to resolve the political impasse and raise the $16.7 trillion borrowing limit without further delay to avoid a global economic catastrophe.
“It is crucial for the members of the US Congress to reach an agreement on the debt ceiling not just for their own country but for the entire world. The world’s largest economy is on the brink of default for no reason other than political posturing in Washington,†said Purisima as he waded into the American budget crisis.
The spending and budget deadlock has partially shut down the US federal government for almost two weeks and could lead to a default as the federal government is projected to run out of cash by the end of October.
The US government has set a deadline of Oct. 17 to agree on a deal or face the prospect of running out of money to pay for public services or cover the interest on its debts.
The Republicans are insisting the White House delay President Obama’s flagship healthcare scheme, Obamacare, by a year before they will agree to permanently raise the debt ceiling.
“It is almost as if they are arguing about how to unlock a bank vault with a live bomb. If they cannot make a deal in time, it will blow up in their hands and take the world’s economies with them, “ Purisima said.
International Monetary Fund chief Christine Lagarde warned that the US failure to raise its debt ceiling would do serious damage to both the American and global economies.
Should the US reach the limit on its borrowings, it would then exhaust any available cash reserves to meet obligations, and it would be forced to choose whether to honor its outstanding obligations selectively, or to dramatically cut spending to meet all its liabilities.
“The US is in political gridlock, failing to reach an agreement over Obamacare - a healthcare reform affecting 313 million people. However, their Congress has to realize the implications of defaulting on $12 trillion of outstanding debt, almost 23 times the $517 billion in debt which forced Lehman Brothers into bankruptcy in 2008,†Purisima said.
“According to the IMF, a US default can drive US long-term rates up by as high as two percent, crash US equity prices by 27 percent, and weaken the dollar by 13 percent. They estimate US growth would likely be reduced by at least seven percent. Emerging markets will see their growth blunted and Europe will be thrown violently back into recession. This is a nightmare scenario of the worst sort and I strongly urge the US political leadership to make all efforts to avoid this,†he added.
DOF undersecretary and chief economist Gil Beltran also noted that the Philippines would have to significantly revise economic planning if the US would default on its debt.
“The Philippines would have to re-evaluate economic projections in light of a US default. For every percentage point rise in US interest rates, Philippine interest rates rise by 0.80 percentage point. Also, for every percentage point rise in Philippine interest rates, the Philippines loses 0.36 of a percentage point in real GDP growth,†Beltran said.
“Fortunately, thanks to our strong and structural current account surplus, which was at 4.4 percent of GDP for the first half of the year, the Philippines has room to offset these negative effects through monetary and fiscal stimulus,†he pointed out.
If the US were to default, it would essentially stop paying the money it owed to US treasury bond holders. This would result to big worldwide financial bubbles, a spike in interest rates and wild gyrations in global financial markets.
The US government currently spends more money than it collects in taxes.
Lagarde stressed that developing nations which have benefited from enormous capital inflows as a result of low interest rates in advanced nations would need to take action as well.