Bailouts, bond conversions, buybacks: with all the headlines coming out of Brussels yesterday, it is very easy to forget that the real looming debt crisis in not in Europe but in the US. If there really is a debt that is too big to fail, this is it. If a deal is not determined in less than two weeks, the consequences will be felt all around the world, from Abu Dhabi to Shanghai, from Sao Paulo to Sydney.
It was William Rhodes, the legendary Citibank executive, who declared in the 1970s that they were making sovereign loans because "countries don't go bust". They might not go bust, but they do run out of money and the ability to repay, or sometimes they just run out of political will.
There is a clock in New York, on 44th Street and 6th Avenue, that updated America's national debt in real time. When the debt surpassed US$10 trillion (Dh36.73tn) on September 30, 2008 the clock stopped because it did not have enough digits to display the figure. For a nation already struggling with a bleak economic outlook, it was an unpleasant reminder of something many preferred to ignore. Several news organisations joked that it was a "sign of the times", while The Onion offered its own verdict: "If everyone just donated one dollar, we would have enough money to buy a new clock."
There are plans to erect a new clock nearby with an additional digit to accommodate the new tally, but so far even that threat has failed to stop the debt growing. At the end of last month the total debt outstanding reached nearly $14.5tn, nearly as much as last year's GDP. According to the IMF, the US has the 12th highest debt-to-GDP ratio in the world.
And according to Gregg Easterbrook, a Reuters blogger: "Stated in today's dollars, one decade ago the national debt was $6.9tn. Today it is $14.3tn — meaning that adjusted for inflation, the United States has borrowed more money in the last decade than in its previous 212 years of existence. And this has been done when there is no national emergency. The country has all manner of problems, but faces nothing remotely like the emergency of World War II."
Just as America dithered about how best to deal with the Second World War, now it is struggling to decide how to resolve the political gridlock over the debt. And the clock is ticking, even if the one in Times Square has stopped: Washington, already suffering from a heatwave, is sweating on a deadline of August 2 to raise the country's debt ceiling of $14.3tn. Republicans are saying that there should be no debt accord without agreeing budget cuts first, while the White House has said that politicians should first agree to raise more debt, then haggle about cuts.
"This is actually a self-created crisis in some ways. It has to do with folks who are digging into set positions rather than saying how do we solve a problem," Barack Obama, the US president, told KMBC, a CNN affiliate in Kansas City.
"My interest here is not scaring people," the president continued. "I want everyone to understand the consequences. If you don't have money you have to make very difficult choices. The fact of the matter is if you don't raise the debt ceiling then we have more obligations - 70 million cheques have to be sent out - and all of those have to be covered."
Saying "there is no reason this should be a problem", Mr Obama urged all the parties again to take "a sensible approach" to the issue, emphasising that a solution should also include major deficit reduction that has both spending cuts and brings in more revenue.
The crisis is not just the talk of Washington and Kansas. Jamie Dimon, the chief executive of JPMorgan, one of Wall Street's biggest banks, told reporters: "No one can tell me with certainty that a US default wouldn't cause catastrophe and wouldn't severely damage the US or global economy. And it would be irresponsible to take that chance."
Ben Bernanke, the chairman of the Federal Reserve, warned of a "huge financial calamity" if a political agreement is not reached. He told Congress a default would "send shockwaves through the entire financial system".
Markets on Wall Street seem undecided as to how serious this crisis is, with some analysts saying there is no panic yet.
"The metaphor is a pile of sand," Mark Zandi, the chief economist at Moody's Analytics, told The New York Times. "You keep putting one piece of sand on the pile, nothing happens, and then, all of the sudden it just caves."
Even if there isn't a default and a deal is reached, just the possibility that it could have happened could have serious implications, especially if US debt continues to grow. "Our aura is diminished. You know people really view the US as the 'AAA', the gold standard, and I think we're tarnishing that," Mr Zandi said.
