That default scenario is bringing increasingly urgent pleas from foreign leaders, some who describe their grave concern, others who chide the United States about the risks of political brinkmanship, beg its leaders to act responsibly and wonder whether the world’s superpower is showing some cracks.
“This is highly important for all of us,” Russian President Vladimir Putin said this week. “I am hopeful that all the political forces in the United States will be able to resolve this crisis as quickly as possible.”
Although the mood from afar hasn’t turned to panic, some in Europe and Asia say they are stunned by the quixotic partisan fervor shaking the pillar of the global economy.
“Parts of America seem to have turned fundamentalist,” said Jesper Koll, the managing director of research at JP Morgan in Japan.
Analysts in London’s financial district fret that a U.S. default could derail Britain’s recovery.
“The outlook for the British economy is decent but still fairly fragile,” said Howard Archer, chief U.K. economist at IHS Global Insight in London. “Anything like a U.S. debt default with significant global repercussions would be bad news for the U.K.”
Political analysts also worry about the impact a default could have on the United States’ diplomatic standing and the broader implications for global security and geopolitics. “What would the world look like if you had America no longer the reliable ally, the provider of global good?” asked Xenia Dormandy, a senior fellow at Chatham House, a London-based think tank.
Economists and traders worldwide think the United States will avert a default with an eleventh-hour deal, as happened in a similar Washington showdown two years ago. Markets, too, have shown few jitters, and several key Asian stock indexes were up slightly Wednesday.
If the United States does default, though, economists say the damage will exceed that of the Lehman Brothers collapse five years ago: Stock market indexes will plummet, borrowing rates will soar and foreign countries holding U.S. Treasury bonds will be devastated by the fallout.
A default also would undercut tenuous signs of recovery in some European countries and in Japan, which is on the upswing after nearly two decades of recession. Japan and China are the top foreign creditors of the United States, and Japan’s share — about $1.14 trillion — is equivalent to nearly 20 percent of its gross domestic product.
A default would mean that “the world’s most important ‘safe’ asset would no longer be safe,” said Willem Verhagen, senior economist at ING Investment Management in London. He added, “A default can set in motion an incredibly complex train of mechanical events in the financial system that is impossible to stop.”
Japanese Finance Minister Taro Aso told reporters Tuesday that the United States should raise its debt ceiling “without delay.” Xu Hongcai, a director at the government-backed China Center for International Economic Exchanges, compared a potential U.S. default to a “hydrogen bomb for the global economy,” according to the Communist Party-run Global Times.
Predicting when a U.S. default would cause mayhem in the markets is difficult — largely because no single indicator would suddenly signal that the United States could no longer pay its bills. Treasury Secretary Jack Lew has said the nation will have only $30 billion in cash on Oct. 17 to meet its commitments. The government could begin missing payments in the days or weeks after that, according to independent analysts.
A default would hit not only the United States’ top trading partners and debt holders but also smaller economies that could have a harder time borrowing or exporting their goods. In its latest global economic report, the International Monetary Fund trimmed its global economic forecasts for 2013 and 2014 and noted slowing growth in emerging markets.
The shutdown has put IMF officials on alert, tracking the possible fallout worldwide. An IMF study this week showed the ripples that even an offhand comment from a U.S. official can generate. The IMF estimated that nearly half a trillion dollars was pulled out of global bond and stock markets when Federal Reserve Chairman Ben S. Bernanke hinted in May at an upcoming end to the Fed’s easy-money policies.
A major U.S.-caused disruption is generally regarded as a “tail risk” — a low-probability event.
But for the rest of the world, the stakes are high. The United States is now retaking its place as the expected prop for global growth, and if it takes a turn for the worse, the rest of the world may follow.
“It could well be that what is now a recovery could turn into a recession or worse,” said Olivier Blanchard, chief economist at the IMF.
Whether or not the United States pulls out of this crisis in time, the political dysfunction has already damaged Washington’s reputation, raising questions about its reliability in other foreign policy roles.
The shutdown prompted President Obama to cancel his trip to the Asia-Pacific Economic Cooperation forum in Bali, Indonesia — a key meeting in a region that the United States had pledged to make a greater priority. In Obama’s absence, Chinese President Xi Jinping tried to draw closer to key neighbors while laying groundwork for new economic deals with Australia, Indonesia and Malaysia.
Speaking at the forum, Putin said he didn’t blame Obama for staying home to deal with his government’s “forced leave.”
“I would not have come either,” he said.
Anthony Faiola and Karla Adam in London, Yuki Oda in Tokyo and Liu Liu in Beijing contributed to this report.