Belfast Telegraph

Saturday 30 August 2014

US economy teetering on the edge of default

Where to start? Well, presuming you've heard enough about 'Murdochgate' over the last couple of days to give you Sun stroke and are more familiar with the Eurozone debt crisis than your own bank account, maybe we should look a little further afield.

Don't be expecting good news though, for it seems the world's largest economy's woes have been overshadowed by the escalating problems in Europe. The attention turns back again to those blasted ratings agencies which have become a bit tiresome for some world leaders and for the US in particular.

The reason is that Moody's has turned its attention to the US's coveted AAA credit rating.

An AAA rating is the equivalent of having an American Express gold card in your wallet. Banks and other investors with a cautious bent rush to lend you money, safe in the knowledge that you're not likely to go bust or give your bank details to a man in Lagos who claims you've been left millions by an unknown relative and he's just waiting to transfer the funds. So, while Enda Kenny is forced to pay a credit card-type interest rate of 13.7% to borrow money, Barack Obama is enjoying secured loan-style rates of 3%.

But once that credit rating wavers, then everything changes. In fact, it's enough for the ratings agencies just to raise a quizzical eyebrow at your balance sheet for some of those investors to go running for something a whole lot more shiny, but more of that later.

In this case, Moody's raised eyebrow is joined by a doubtful pout and a shake of the head.

The reason? Well, the US is on the brink of a default on its loans. The powerhouse economic behemoth could be in a position where it can't pay its military's salaries and social security payments.

Washington, we have a problem.

That problem is the fact the US national debt cannot legally exceed $14.29 trillion (£8.86tn), a level which was hit in May.

Either the US ups its debt ceiling and issues new debt or it doesn't and ends up being unable to borrow and defaults on its bills.

Lifting the debt ceiling is not unheard of and, indeed, has been carried out more than 70 times since the 1960s and although not a great reflection on the country's financial management, it's better than a default.

The problem is Republicans and Democrats can't agree on how the country's debt problem is going to be brought under control.

And if an agreement is not reached by August 2 - when any remaining funding is expected to dry up - a default is almost certain.

Time will tell how this one proceeds but even the most bullish economists are not ruling out a default.

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