Barack Obama wants a temporary increase in the debt limit. AFP
Barack Obama wants a temporary increase in the debt limit. AFP

Standoff on US debt carries risk of global financial storm



The global economy is at its most critical phase since the dark days of 2008. Two crises are looming that, according to some experts, could hurl the tentative recovery back into a full-blown recession and undo the gains of the past couple of years.

In the US, the unthinkable is looming fast: America, the biggest economy in the world and the hub of the financial system, could default on its obligations, with its sovereign debt downgraded. If the politicians cannot do a deal by August 2 - and so far the omens are not good - the US will be in breach of its borrowing limits.

For you and me, this would be a serious matter. If the bank tells us no when we ask for an overdraft or a new loan, we're likely to face some stark financial choices.

But for the US, and the rest of the world, it would be disastrous. American debts are already at an all-time high and will go through the agreed borrowing limit of US$14.3 trillion (Dh52.52tn) early next month.

Barack Obama, the US president, wants a temporary increase in that facility, no more than a couple of trillion, in exchange for a longer-term deal on permanently reducing the deficit. The Republican-led House of Representatives is saying no, especially to any deal that involves tax increases without cuts in public spending.

If no deal is done by the deadline, some federally funded services would simply seize up. Food production, for example, would be hit because government food inspectors would have to be laid off. This risk to people's food supplies is a measure of how serious the repercussions are for all Americans.

The global financial consequences would be enormous. If the US loses its triple-A investment status, dollar-denominated assets around the world would plunge in value. Big investors, such as the Chinese, might consider dumping more dollars. Foreign currency markets would go into spasm. The supply of credit, just freeing up after the 2008 crisis, could be switched off again.

The president, with only a hint of brinkmanship in the talks with congressional leaders, has talked of Armageddon.

But, as if to prove that they can match the Americans in anything, on the other side of the Atlantic the Europeans are brewing up their own financial storm.

Last week, the year-long crisis over Greek debt finally burst out of Athens and threatened to engulf Italy, Spain and the rest of the euro zone. Commentators have talked before of the "end of the euro", but those warnings were suddenly more real and imminent than at any time before.

As in the US, the argument in Europe is not about what to do but how to do it. Greece needs to agree on a refinancing deal with creditors in order to obtain its next cash injection from European and international lenders.

European finance leaders floated the idea of a deal that would share the pain of any Greek default between governments and private institutions, but the markets took fright at this. If Greece were allowed to default on private debt, why not Italy (Europe's biggest public debtor) or Spain? The ghastly prospect was of a domino effect through the euro zone's bigger economies.

If the US and euro-zone debt crises both broke together, it would be a "perfect storm" in the financial markets. In those circumstances, even the Chinese economy, the main force behind the recovery to date, would suffer badly and could not be expected to compensate for the transatlantic meltdown.

Such crises tend to focus the mind of even the most parochial of policymakers, and it could be that the political players get their act together to avert catastrophe.

Likewise, the current patchiness of the global economy could be only a brief interlude, before we get back to Asian-led growth.

But the alternatives if both those eventualities fail are stark indeed. Some financial experts are talking of the need for the US and Europe to "monetise" their debts, which in plain speech means printing more dollars, euros and pounds - the inflationary consequences for the rest of the world be damned.

Again, that would create havoc in currency markets and raise the possibility of China and other dollar investors simply dumping the currency, the financial equivalent of a declaration of war.

The world suffered summer financial crises in 2007 and 2008, before a couple of years quietly rebuilding. The risk of another global financial storm in the next few weeks is increasing rapidly.

How to protect yourself when air quality drops

Install an air filter in your home.

Close your windows and turn on the AC.

Shower or bath after being outside.

Wear a face mask.

Stay indoors when conditions are particularly poor.

If driving, turn your engine off when stationary.

Like a Fading Shadow

Antonio Muñoz Molina

Translated from the Spanish by Camilo A. Ramirez

Tuskar Rock Press (pp. 310)

COMPANY%20PROFILE%20
%3Cp%3E%3Cstrong%3ECompany%20name%3A%20%3C%2Fstrong%3EAlmouneer%3Cbr%3E%3Cstrong%3EStarted%3A%3C%2Fstrong%3E%202017%3Cbr%3E%3Cstrong%3EFounders%3A%3C%2Fstrong%3E%20Dr%20Noha%20Khater%20and%20Rania%20Kadry%3Cbr%3E%3Cstrong%3EBased%3A%20%3C%2Fstrong%3EEgypt%3Cbr%3E%3Cstrong%3ENumber%20of%20staff%3A%20%3C%2Fstrong%3E120%3Cbr%3E%3Cstrong%3EInvestment%3A%20%3C%2Fstrong%3EBootstrapped%2C%20with%20support%20from%20Insead%20and%20Egyptian%20government%2C%20seed%20round%20of%20%3Cbr%3E%243.6%20million%20led%20by%20Global%20Ventures%3Cbr%3E%3C%2Fp%3E%0A
BEETLEJUICE BEETLEJUICE

Starring: Winona Ryder, Michael Keaton, Jenny Ortega

Director: Tim Burton

Rating: 3/5

Venom

Director: Ruben Fleischer

Cast: Tom Hardy, Michelle Williams, Riz Ahmed

Rating: 1.5/5

COMPANY%20PROFILE
%3Cp%3E%3Cstrong%3EName%3A%3C%2Fstrong%3E%20PlanRadar%3Cbr%3E%3Cstrong%3EStarted%3A%20%3C%2Fstrong%3E2013%3Cbr%3E%3Cstrong%3ECo-founders%3A%20%3C%2Fstrong%3EIbrahim%20Imam%2C%20Sander%20van%20de%20Rijdt%2C%20Constantin%20K%C3%B6ck%2C%20Clemens%20Hammerl%2C%20Domagoj%20Dolinsek%3Cbr%3E%3Cstrong%3EBased%3A%20%3C%2Fstrong%3EVienna%2C%20Austria%3Cbr%3E%3Cstrong%3ESector%3A%20%3C%2Fstrong%3EConstruction%20and%20real%20estate%3Cbr%3E%3Cstrong%3ECurrent%20number%20of%20staff%3A%20%3C%2Fstrong%3E400%2B%3Cbr%3E%3Cstrong%3EInvestment%20stage%3A%20%3C%2Fstrong%3ESeries%20B%3Cbr%3E%3Cstrong%3EInvestors%3A%3C%2Fstrong%3E%20Headline%2C%20Berliner%20Volksbank%20Ventures%2C%20aws%20Gr%C3%BCnderfonds%2C%20Cavalry%20Ventures%2C%20Proptech1%2C%20Russmedia%2C%20GR%20Capital%3C%2Fp%3E%0A
Five expert hiking tips
    Always check the weather forecast before setting off Make sure you have plenty of water Set off early to avoid sudden weather changes in the afternoon Wear appropriate clothing and footwear Take your litter home with you
Points about the fast fashion industry Celine Hajjar wants everyone to know
  • Fast fashion is responsible for up to 10 per cent of global carbon emissions
  • Fast fashion is responsible for 24 per cent of the world's insecticides
  • Synthetic fibres that make up the average garment can take hundreds of years to biodegrade
  • Fast fashion labour workers make 80 per cent less than the required salary to live
  • 27 million fast fashion workers worldwide suffer from work-related illnesses and diseases
  • Hundreds of thousands of fast fashion labourers work without rights or protection and 80 per cent of them are women
The specs

Engine: 3.5-litre V6

Power: 272hp at 6,400rpm

Torque: 331Nm from 5,000rpm

Transmission: 8-speed auto

Fuel consumption: 9.7L/100km

On sale: now

Price: Dh149,000