US borrowing crisis 'days away' from danger, says World Bank head

 

Jim Yong Kim: "We are now five days away from a very dangerous moment"

The president of the World Bank, Jim Yong Kim, has warned that the United States is just "days away from a very dangerous moment" because of the government's borrowing crisis.

He urged US policymakers to reach a deal to raise the government's debt ceiling before Thursday's deadline.

The US Treasury will start to run short of funds if no agreement is reached for it to borrow on financial markets.

Mr Kim warned this could be a "disastrous event" for the world.

"The closer we get to the deadline the greater the impact will be for the developing world.

"Inaction could result in interest rates rising, confidence falling and growth slowing," said Mr Kim, speaking at the World Bank's annual meeting in Washington.

Start Quote

There are three examples in US history that come close to default, with the most recent occurring in 1979”

End Quote

"If this comes to pass it could be a disastrous event for the developing world and that will in turn greatly hurt the developed economies as well," he added.

'Uneasy'

If the US does run short of cash, this could cause it to default on its debts, a development which would be likely to have a severe effect on financial markets around the world.

The BBC's Andrew Walker said that finance ministers from other countries think the US probably won't default, but they are uneasy and want the crisis resolved very soon.

Republicans and Democrats failed to come to an agreement on Saturday, but Senator Dick Durbin, a Democrat, said the aim was to reach a deal on extending the debt limit before markets reopen on Monday.

The White House rejected a deal for a short-term increase to the borrowing limit.

"It wouldn't be wise, as some suggest, to just kick the debt ceiling can down the road for a couple of months, and flirt with a first-ever intentional default right in the middle of the holiday shopping season," said President Barack Obama.

Shutdown

The US government has been in partial shutdown since Congress missed a 1 October deadline to pass a budget, with politicians being unable to agree funding for current spending.

This has resulted in hundreds of thousands of federal employees being sent home and government offices closing.

Arizona Governor Jan Brewer announces the reopening of the Grand Canyon National Park

Republicans refused to approve the new budget unless President Obama agreed to delay or eliminate the funding of the healthcare reform law of 2010.

US Treasury Secretary Jack Lew has estimated that each week the government is shut down, 0.25% is shaved off economic growth, which was already expected to be a sluggish this quarter.

Debt burden

Mr Lew has also has warned that letting talks over the debt ceiling go down to the wire "could be very dangerous".

The current debt limit of $16.699 trillion was reached in May.

Start Quote

It would ripple through the world economy in a way that you couldn't possibly understand”

End Quote Jamie Dimon Chief executive, JP Morgan

Since then the US Treasury has been using what are called extraordinary measures to keep paying the bills, but those measures run out on 17 October.

Every week, the Treasury also has to refinance $100bn worth of debt in the form of US government bonds known as treasuries.

The US also has to pay interest on its huge debt burden.

An inability to pay that interest, or pay back debt if required, would put the US into default.

On Saturday, Jamie Dimon, boss of the American bank JP Morgan said the possible repercussions did not bear thinking about.

"You don't want to know [what would happen]," he said.

"It would ripple through the world economy in a way that you couldn't possibly understand."

 

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  • rate this
    +8

    Comment number 851.

    This is what the rest of the world gets for tying their economic livelihood to America's economic activities and well-being. American politicians behave as badly as many other politicians around the world. If the rest of the world is tired of "being held ransom" then it's time for the rest of the world to cut the apron strings & develop individual policies that promote economic independence.

  • rate this
    +22

    Comment number 602.

    The fact that so many people around the world are worried about this demonstrates how tied in we all are to world economics. The US government is holding the entire world to ransom over petty political issues.

    It's like a child smashing his toys so his younger brother can't have them either. It's pathetic that grown men do these things.

  • rate this
    +2

    Comment number 530.

    I think they should miss the deadline and then after that see how they can deal with a huge impact it will create. Let all the world see how stupid the US goverment really is (as well as all governments) they only thinking about their own pockets. I wouldnt be surprised if some of them have some bets on not reaching the deadline.

  • rate this
    +4

    Comment number 484.

    This could be potentially catastrophic.Seeing as the West only narrowly avoided complete financial meltdown in 2008 its not as if we are in the best of economic health.It really could end up being world depression as opposed to recession.

    China and Japan must be getting nervous if the US default if they are owed the most...

    Unless the USA has a cunning plan...

  • rate this
    +2

    Comment number 426.

    Bang! goes any chance of me finding a new job here in Europe, When money flow in US starts getting tight, the first thing US companies will do is start letting go overseas employees followed by shutting off overseas investment's & Aid

 

Comments 5 of 9

 

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