The messy and protracted spat in Washington DC which has led to parts of the US government shutting down is but a precursor to a much bigger problem. In a couple of weeks the government – whether shut down or not – will run out of cash.
Normally America simply borrows more to fund itself. Like the UK, it is running a budget deficit, spending more than it brings in taxes and other revenues. But the US government has a debt ‘ceiling’ – a strict limit on how much the government can borrow each year - and any more has to be approved by Congress. The wrangling over the shutdown suggests they won’t be able to thrash out a deal to raise the ceiling either.
This is much more serious. It would lead to a technical default on American government bonds. As with any debtor unable to repay repayments on a loan the lenders, banks, other governments, would suddenly lose faith in America’s credit worthiness.
In an extraordinary note published this afternoon the US Treasury – a branch of the government – explains the consequences in a message intended, it seems to me, to be aimed as much at the politicians in Congress as the people of America:
The United States has never defaulted on its obligations, and the U. S. dollar and Treasury securities are at the center of the international financial system. A default could be unprecedented and has the potential to be catastrophic: credit markets could freeze, the value of the dollar could plummet, US interest rates could skyrocket, the negative spillovers could reverberate around the world, and there might be a financial crisis and recession that could echo the events of 2008 or worse.
Political brinksmanship that engendgers even the prospect of a default can be disruptive to financial markets and American businesses and families.
The US got close to default in 2011 and it triggered a fall of almost a fifth in shares; business and consumer confidence plunged, the economy shrank. The Treasury won’t put a figure on what would happen if the country were actually to default but its serious concern is clear.
And if the largest economy in the world were in trouble, it would kill off the weak recovery we are just beginning to see in the UK and the rest of Europe. Market turmoil, seizure in the banking system as institutions lost faith in each other's stability ... we've been here before.
The good news is that the politicians are still talking, even if the rhetoric is more and more forthright. They have days to set aside their differences.