Leading article: Washington hurtling towards a global financial crisis

Sunday 23 October 2011 03:52

A dangerous game is being played by politicians in America. Republican negotiators are refusing to raise the cap set by Congress on the amount of debt the government in Washington can legally borrow. The United States hit its $14.3 trillion "debt ceiling" in May and the Obama administration has been juggling the finances since to continue to pay the daily bills. But on 2 August it will run out of room to do that. America will have to default on some of its due payments.

No one assumed that would really happen. Democrat and Republican politicians are used to political roller-coaster rides, with last-minute deals averting disaster. But they are really going to the wire this time. Washington is hurtling toward a crisis. The credit ratings agency Moody's has warned that the US could lose its AAA credit status if the debt ceiling is not raised. Now the markets, which had assumed a deal would be done, have become twitchy. Money is being switched from dollars. Gold has hit a record high. China is concerned that the dollar's status as the world's reserve currency could be damaged.

US borrowing needs to be brought under control. Both sides agree on that. But the Democrats want spending cuts plus tax rises, including income tax, over the long-term and the Republicans just want swingeing cuts. This tight deadline might seem to offer leverage to politicians of both sides. But this brinkmanship is supreme recklessness. Even a short suspension of debt repayments from America would cause a meltdown in the world's financial markets to make the 2008 crisis look trivial. If US politicians cannot at this stage agree a credible long-term plan to curb the nation's budget deficit they must lift the debt ceiling and proceed with their negotiations after that. Anything else represents catastrophic irresponsibility.

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