Debt Ceiling Talks: Anger At U.S., Shades Of Panic As Deal Remains Elusive
As the deadline for Washington to raise its debt ceiling grows closer and negotiations remain as far apart as they have ever been, a slowly growing tide of anger aimed at the U.S. is surfacing among the world's investors, pundits and politicians.
The possibility that the Aug. 2 deadline to raise the debt ceiling will pass without an agreement has begun taking a visible toll on the markets. All-out panic hasn't set in, but Asian and European markets sank on Monday, following a weekend during which talks between President Obama and House Majority Leader John Boehner collapsed after less than an hour.
Gold -- a commodity to which investors flock in times of uncertainty -- rose to a new record Monday, trading as high as $1,624.30 on fears that a failure to raise the debt ceiling could destabilize the global economy.
Investors who hold assets in US dollars are growing worried their investments may be worth far less if the US dollar collapses following the debt ceiling deadline, just as owners of US debt fear bond yields will spike following the deadline.
A sense of gloom and even a hint of panic was evident throughout the weekend, as the prognoses of politicians and economic analysts grew more dire -- and more hostile towards the U.S. government.
The most notable salvo came this weekend from Vince Cable, the Liberal Democrat business secretary in British Prime Minister David Cameron's coalition government.
"The irony of the situation at the moment is that the biggest threat to the world financial system comes from a few right-wing nutters in the American Congress rather than the Eurozone," Cable told BBC News.
Market analysts, who have overall discounted the possibility that the U.S. could stop paying at least some of its bills on Aug. 2., appear to be taking the possibility more seriously following this weekend's negotiation breakdown.
"Up until now the markets have given U.S. politicians the benefit of the doubt with respect to passing a package, taking the view that despite all the posturing neither side would be stupid enough to risk a run on U.S. Treasuries, as well as the likelihood of a damaging default," said CMC Markets analyst Michael Hewson. "Treasuries have so far been largely immune from the turbulence in financial markets as a result of the turmoil in Europe. As the Aug. 2 deadline looms ever closer without any agreement, this could well change and push yields higher."
Financial Times star columnist Clive Crook, generally considered a booster of the American economy, wrote Monday that he is "having second thoughts" about the U.S.'s ability to pull itself out of a political "paralysis."
"On one side you have the unrivalled energy and ambition of the American worker," Crook wrote. "On the other you have the unrivalled complacency, self-righteousness and bloody-mindedness of Washington. I never thought I would say this, but I am starting to wonder which will prevail."
But some market analysts argued there is no need for the world's investors to panic. Even if legislators fail to raise the debt ceiling, it may not prove to be the disaster that many are coming to expect. Investors will continue piling into the US dollar and US debt, the argument goes, because in today's economic environment, there simply aren't any alternatives.
"[The US] may have a technical default but I don't think that will mean that people will stop buying treasuries or stop buying dollars because you don't have alternative investment tools," Yuuki Sakurai, CEO of Fukoku Capital Management, told the Financial Post.
"Investors would surely demand more compensation to lend to the government, but Treasuries could benefit, ironically, from safe-haven demand given the lack of deep, liquid alternatives and from the likely negative impact on the still-fragile U.S. economy," CMC Markets's Hewson said.