A US default will affect the whole world. And there’s a week left

Even US President Joe Biden’s personal meeting with the head of the House of Representatives, Kevin McCarthy, on Monday night has yet to produce an agreement on raising the US debt ceiling, which would avert the impending insolvency of the federal government. According to the AP and Reuters agencies, McCarthy said this after the meeting in the White House. If Congress does not raise the US debt ceiling, default could occur as early as June 1. And the whole world would feel the consequences, the AP agency reported.

Swiss investors with US bonds would suffer losses. Chinese factories supplying electronics to the United States could face a halt to orders. Businesses in Sri Lanka could no longer rely on the dollar as an alternative to the national currency. According to the AP agency, even such consequences could be brought about by the insolvency of the American government. Such a scenario would not only damage the American economy.

No corner of the world will be spared

Speculation about potential problems is mounting as the US Congress runs out of time to raise the statutory US debt limit. Without this step, the government could run out of money to repay its obligations within two or three weeks, and US Treasury Secretary Janet Yellen warns that the effects would be global. However, the development is very difficult to predict, as the USA has never reached insolvency.

US stocks are rising. Investors believe the US will avoid default

US stocks rose on Thursday on lingering optimism that a deal on the debt ceiling could be reached in the coming days. Retail company Walmart also provided market support thanks to a favorable annual sales forecast.

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What seems clear is that the consequences would be more dramatic if the disputes over raising the debt ceiling were to drag on after the outbreak of the crisis. Moody’s Analytics chief economist Mark Zandi said that under such a scenario, “no corner of the global economy will be spared”.

US bonds are the basis of global trade

According to the AP, the nervousness is due to how much of the financial activity is based on the confidence that the United States will always repay its obligations. American bonds have long been considered a very safe investment and form the basis of global trade. They are used around the world to secure loans, as insurance for banks against losses, or as a way for central banks to deposit their foreign exchange reserves.

The White House is borrowing the most expensive short-term loans in history. The fear of US bankruptcy is growing

The United States government is borrowing at the highest rate in history. The reason is the growing fear of US bankruptcy, which may lead to an unprecedentedly divided Congress. American lawmakers are still unable to agree on an increase in the public debt limit. Without this increase, most likely from this summer, but perhaps from the beginning of June, it will not be possible to properly ensure the operation of the United States, points out the chief economist of Trinity Bank Lukáš Kovanda.

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A default could rock the $24 trillion Treasury debt market, paralyze financial markets and spark an international crisis,” AP writes. Another factor is the global dominance of the American currency: according to the International Monetary Fund (IMF), dollars represent 58 percent of all foreign currency reserves of central banks in the world.

A default could shake the market for $24 trillion in Treasury debt, paralyze financial markets and spark an international crisis,” the AP said.

The dollar has such confidence that merchants in some countries demand it instead of paying in national currencies. An example is Sri Lanka, which is plagued by high inflation and the collapse of its domestic currency, the Sri Lankan rupee. Or Lebanon, where due to problems with inflation, many shops and restaurants require dollars from customers.

Trader’s week: The traditional dance around debt in the US scares the stock market

In the past period, technology companies continued to pull the US stock market upwards, with Microsoft in particular attacking its all-time highs in anticipation of the AI ​​”boom”. The US Nasdaq is at its highest levels since last August. The situation surrounding the negotiations on the US debt limit is gradually improving. President Biden remains optimistic about reaching a deal, but markets are primarily watching House Speaker Kevin McCarthy’s comments on the issue. And what is happening around CEZ shares?

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Last week, The Washington Post (WP) wrote in an analysis of possible developments that a prolonged US default could deepen instability in such countries, while economists fear a significant expansion of the group of countries “drowning in debt”.

According to Zandi, a US hit to the debt ceiling could paradoxically result in a stronger dollar, at least in the short term, because investors “wouldn’t know where to go other than where they always go when a crisis comes.” But bond trading would likely be crippledreports AP.

Playing with fire. Not moving the debt ceiling would mean a financial apocalypse for Americans

The polarization of American society has turned the once relatively routine act of pushing the debt limit into a recurring political crisis, with the opposition blackmailing the ruling administration. At the same time, ordinary Americans would feel the consequences of the worst option, i.e. insolvency.

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If the credibility (of the bonds) is damaged for any reason, it will shake the whole system… and it would have huge implications for global growth,” said Maurice Obstfeld, former IMF chief economist and analyst at the Peterson Institute for International Economics (PIIE).

The previous crisis cost taxpayers a billion

According to WP, the current risk is already causing concern on the financial markets. The newspaper recalled that when the US approached insolvency in 2011, the rating agency Standard & Poor’s downgraded the US debt, which caused a drop in stock prices and, ultimately, according to the Government Comptroller’s Office (investigative body of Congress; editor’s note) costing taxpayers more than a billion dollars in increased cost of borrowing.

Catastrophic scenarios can still be averted by lawmakers in Congress. However, the Republican majority in the House of Representatives refuses to approve additional US borrowing unless the Democrats, led by President Joe Biden, make significant cuts in government spending and other concessions. And the negotiations continue.

The manipulation of interest rates during the financial crisis was coordinated by central banks and governments, the media write

The manipulation of interbank interest rates at the height of the financial crisis in 2008 was deeper than previously reported, according to the media. The British newspaper The Times published new findings on Monday, based on fresh evidence, showing that the manipulation of the key LIBOR and EURIBOR rates was coordinated by the governments and central banks of Western countries to artificially restore calm to the market.

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All about inflation

Inflation scarecrow. What causes it? How to defend against her? How to invest, where to save savings, where there are decent interest rates, which bonds are worth it? How do the state, the government and the CNB fight inflation? Who and why increases the price and how much? How to cope with price increases? Is it the right time to get a mortgage, will interest rates rise or fall, and for what reason? Context, tips, hints, warnings.

High inflation troubles not only the Czech Republic, but also other European countries and the United States. See the overview in the world.

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2023-05-23 05:24:00

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