An expert in emerging global economies has stated that International Monetary Fund’s warning of the US’ failure to raise the debt ceiling would seriously damage the American and global economy.
Raja Kali, an economics professor at the University of Arkansas believes the impact of the shutdown thus far is relatively minor but it could produce deleterious consequences for both domestic and international financial markets. Kali said that the real concern is the threat that Congress and President Obama will fail to raise the debt ceiling by the Oct. 17 deadline, as indicative from the reports that markets are currently waking up to the government shutdown and debt ceiling.
During the last debt-ceiling crisis, S&P downgraded the US government credit rating from AAA to AA+, which impaired investor confidence in US Treasury bonds and Kali warned that current crisis could cause similar reaction. If the debt ceiling is not raised, the US Treasury will have difficulty paying its bills, may have difficulty paying interest and principal on Treasury securities and may be forced to renege on Social Security payments.
Kali further said that if the debt ceiling is not raised, investors may decide that US Treasury bonds are no longer the world’s most secure investment and ultimately interest rates across the board will rise, as will costs for mortgages, car loans and corporate borrowing. He further said that the crisis could cause credit markets to freeze, and the value of the US dollar to plummet and all of these consequences will cause turmoil in international financial markets and could trigger a global economic crisis.