What's driving the debt-ceiling crisis?
In recent years the world has become used to seeing government debt crises wrack Western countries. But whereas the crises in Greece, Spain, Portugal, and elsewhere have been driven by economic factors, the crisis in the United States is purely a political quarrel.
"This is sort of a homemade crisis," notes Johannes Thimm, an expert on trans-Atlantic relations at the German Institute for International and Security Affairs in Berlin. "You can argue about whether the debt of the United States has become too big as a ratio of their gross domestic project or their budget or any of these measures, but right now it is because of the gridlock in Washington that this crisis erupts and not because the markets distrust the Americans' ability to service their debt."
Instead, what drives the crisis are deep ideological differences over appropriate levels of government spending. That mirrors debates in other countries now recovering after years of economic slowdown precipitated in part by heavy government borrowing to fund social and other programs.
"You have the Democrats and some of the more establishment people in the Republican Party basically saying that we have had a period of austerity, therefore the idea we should cut back even more would be bad for the economy, we need to keep government spending going and we should increase the debt ceiling," says Matthew Elliot, founder of the London-based U.K. Taxpayers Alliance.
"Whereas you have people on the free-market side of the Republican Party, the side which has been influenced by the Tea Party movement, and they are saying that we haven't really had any serious austerity, we still have huge deficits every year, the national debt is going up and therefore we need to cut back in a big way."
Can a political solution be found?
Many observers expect the showdown to end as the last U.S. debt-ceiling crisis did in 2011. Then, the two political parties reached an 11th-hour agreement to make spending cuts and raise the debt limit, thus averting a default.
But passions around this crisis are higher on both sides than three years ago. The debt-ceiling crisis comes as a deadlock between the two political parties has already forced a partial government shutdown since October 1 because they cannot agree on the government's proposed budget for the new fiscal year.
Still, the homemade rather than external nature of the crisis makes it one the United States can solve through compromises by both parties. However, it also means it will likely be averted only at the very last moment and amid very tough negotiations.
Could the U.S. economy be damaged even if the crisis is averted?
It is a real possibility. The international credit-rating agency Standard & Poor's cut the U.S. ranking from top level AAA status to next best AA+ status in August 2011 following Washington's last battle over the debt ceiling. That meant that the international investment community lost some of its confidence in the belief that the United States will always be a country that pays its bills on time and in full -- regardless of its political conflicts.
Ilzetzki says that continued political wrangling of the kind going on in Washington now cannot help but contribute to a further weakening of investor trust over time. And that includes trust in the U.S. dollar as the international reserve currency.
"The day will come, whether it is 10 years from now, or 20 years from now, or 50 years from now, that the dollar may very well lose its status to some other currency, be it the euro or the Chinese yuan or some other currency," Ilzetzki says. "I have no doubt that when history is written decades from now, the political battles that we are seeing now in Washington will probably be faulted for that."
Copyright (c) 2011. RFE/RL, Inc. Reprinted with the permission of Radio Free Europe/Radio Liberty, 1201 Connecticut Ave., N.W. Washington DC 20036. www.rferl.org
(c) 2011 Federal Information & News Dispatch, Inc.
Original headline: Explainer: What To Know About The Looming U.S. Debt-Ceiling Crisis
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