US and EU Debt Crises: The Perfect Storm?
Wednesday, July 27, 2011
With Treasury Secretary Tim Geithner's August 2 deadline for Congress to raise the US statutory 'debt ceiling' fast approaching, concern is growing that the United States could enter 'voluntary default', precipitating a period of dangerous market volatility -- and perhaps pitching the global economy back into recession. In the context of a rolling EU sovereign debt crisis, which may also be slipping towards a scenario in which one or more distressed economies experience disorderly defaults, this creates a small but dramatic risk of renewed systemic crisis in the global financial system -- as access to wholesale credit again dries up in economies from Canada to China. Worse, the world currently appears much less well equipped to combat and mitigate the effects of such a meltdown, with interest rates throughout much of the developed world currently at all-time lows and the same governments wrestling with exceptionally high debt-to-GDP ratios -- apparently precluding further fiscal or monetary policy intervention.
This call will investigate the possibility of a self-inflicted crisis in which markets punish policymakers for sluggish or ineffective action in the face of looming risks.
Key issues include:
- the danger of a voluntary US default caused by political dysfunction in Congress, and the damage that the prolonged standoff has already done to market confidence and the sputtering US economic recovery;
- the impact that US and European fiscal consolidation will have on the global economy, in the context of a sputtering recovery;
- the possible parallels between the current US and EU situations, and questions of whether the EU's quagmire is materially worse due to the nature of governance in the euro-area;
- the positive, negative and neutral scenarios that can guide investment decisions in this volatile climate; and
- the next spikes in market concern, assuming that the immediate crises are again averted without being resolved.
