We thought 2008 was bad, if the U.S. really defaults on their debt, it will have wide reaching affects on every country in the world. The White House must curb spending in order to get control of their debt, if not defaults may end up happening for real in the coming years. With the bad job report last week as well as the very poor housing report it is looking more and more like a double dip recession for the U.S. Government needs to understand that it is private industry that creates jobs, not unions, not government, but private industry. The trillions spent in 2008-11 have mostly been labelled for government and union friendlies, that is why their attempt at spurring on the economy has failed so badly. Reagan had it right when he cut taxes for industry and made the next 20 years the most successful in U.S. history. By spurring on industry to hire, expand operations etc he pulled the U.S. out of a worse funk than 2008. Unfortunately Obama has taken too many notes from Carter and has led the country down the same path. What the U.S. needs is another Reagan to step forward and lead, unfortunately I do not see one yet in the Republican lineup.

Worries grow that U.S. could default on debt

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Li Daokui, an adviser to the People’s Bank of China, said a default could undermine the U.S. dollar, and Beijing needed to dissuade Washington from pursuing this course of action.

Reuters Jun 8, 2011 – 6:48 PM ET | Last Updated: Jun 9, 2011 10:04 AM ET

By Walter Brandimarte and Emily Kaiser

SINGAPORE/WASHINGTON — The possibility that the United States could default on its debt — if only for a few days — is starting to alarm the global community even as the idea gains favour among Republicans as a way to force Washington to cut runaway spending.

Fitch Ratings agency warned Wednesday that U.S. treasury bonds, seen worldwide as a risk-free investment, could be labelled “junk” if the government misses debt payments by Aug. 15.

Meanwhile, an advisor to China’s central bank said U.S. Republican lawmakers are “playing with fire” by contemplating even a brief debt default while a prominent Fed official said the reverberations in global markets would be “very severe.”

The idea of a technical default — essentially delaying interest payments for a few days — has gained backing from a growing number of mainstream Republicans who see it as a price worth paying if it forces the White House to slash spending.

But “even a so-called ‘technical default’ would suggest a crisis of ‘governance’ from a sovereign credit and rating perspective,” Fitch said in a statement.

“Clearly the political signals which are coming (from Washington) are a source of concern,” David Riley, head of sovereign ratings at Fitch, said in an interview.

Fitch said the ratings would go back up once the government fulfills its debt obligations but probably not to the current AAA level, Fitch said.

President Barack Obama is trying to win congressional approval to raise the borrowing authority before an Aug. 2 deadline.

The Republicans’ theory is that bondholders would accept a brief delay in interest payments if it meant Washington finally addressed its long-term fiscal problems, putting the country in a stronger position to meet its debt obligations later on.

But even Fed officials are starting to get worried about the game of chicken. St. Louis Federal Reserve Bank President James Bullard said “the U.S. fiscal situation, if not handled correctly, could turn into a global macro shock.”

“The idea that the U.S. could threaten to default is a dangerous one,” Mr. Bullard said in an interview with Reuters.

“If it were just U.S. markets, it might not cause too many problems, but we’ve got people participating in foreign markets who are probably not as tuned in to the U.S. political situation,’’ Mr. Bullard said. “The reverberations in those global markets would be very severe. That’s where the real risk comes in.”

China, the largest foreign creditor to the United States, with more than US$1 trillion in treasury debt on its books, also appears to be getting worried.

Li Daokui, an adviser to the People’s Bank of China, said a default could undermine the U.S. dollar, and Beijing needed to dissuade Washington from pursuing this course of action.

“I think there is a risk that the U.S. debt default may happen,” Li told reporters on the sidelines of a forum in Beijing. “The result will be very serious and I really hope that they would stop playing with fire.”

Interviews with government officials and investors in Asia show they consider a default such a grim — and remote — possibility that it was nearly impossible to imagine.

“How can the U.S. be allowed to default?” said an official at India’s central bank. “We don’t think this is a possibility because this could then create huge panic globally.”

Indian officials say they have little choice but to buy U.S. Treasury debt because it is still among the world’s safest and most liquid investments. It held US$39.8-billion in U.S. Treasuries as of March, U.S. data shows.

Oman is concerned about the impact of a default on the currency reserves of the sultanate and its Gulf neighbours.

“Our economies are substantially tied up with the U.S. financial developments,” said a senior central bank official, who spoke on condition of anonymity.

The U.S. Congress has balked at increasing a statutory limit on government spending as lawmakers argue over how to curb a deficit which is projected to reach US$1.4-trillion this fiscal year. The U.S. Treasury Department has said it will run out of borrowing room by Aug. 2.

Marc Ostwald, a strategist with Monument Securities in London, called the default scenario “frightening” and said bondholders’ patience would wear thin if lawmakers persisted in pitching this strategy in the coming weeks.

“This isn’t a debate, this is like a Mexican standoff and that is where the problem lies,” he said.

© Thomson Reuters 2011