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The prospects of bankruptcy in troubled EU states are bad enough, but the fiscal ceiling that the US is approaching promises even greater turmoil
Certain blunt facts will startle you: UK’s $84 million installment is the last in a series of them to US, which UK owed on a $4.34 billion loan that saved it from an imminent bankruptcy following an expensive (in every possible way) World War II. Generically speaking, UK has never gone for a dive. In fact, neither have the countries where the Anglo Saxons migrated – like US, Canada & Australia. By contrast, Portugal, Greece and Spain have been busted 5, 5 and 7 times respectively. Surprisingly, Greece has spent almost half of its free existence in the last 182 years under the clouds of default. A ramification of the same is the dearth of overseas capital entering the country – a trend that may continue well into the future. And things might be worse.
Chances for a reprieve for Greek lawmakers are disappearing rapidly; as Greece could see its debt peaking at 190% of GDP by 2014. As of November 21, Eurozone nations were still at an impasse with the IMF on how they could help Greece maintain its debt at a sustainable level, which was meant to be a precursor towards releasing the aid that’s necessary to keep Greece standing. Two major contentious issues have been identified. One is on the timeline for reducing Greek debt to a sustainable 120% of GDP. Eurozone lenders feel it should be extended to 2022, but the IMF wants Greece to stick to the original year of 2020. The second is with respect to how they should fund Greece’s shortfall of around Euro 14 billion by 2014.
Following the heels of Greece are Portugal and Spain. But what is most intriguing is a similar currency crash among eastern European countries, which are newly integrated into global financial markets. A prime example of a steep slide from a built-in economic boom in a space of a few months is Ukraine, which happens to be Europe’s largest country. From 2007 till the beginning of 2009, a huge load of foreign capital was showing up in Ukraine. Steel, which is Ukraine’s top export, was seeing far happier times, as its price in July 2009 was $240 per ton, a cut above the January figure of $170 per ton. Wages and pensions were revised and raised, the savings accounts gone astray during the transfer from the Soviets was substituted, credits were extended to consumers without evaluating credit worthiness… and so on. However, hell broke loose when steel prices came crashing down, and in just about a year, foreign debt rose to $99 billion from $34.3 billion with a consequent dry up of foreign capital. Meanwhile, the common people are helplessly observing the thinning of their savings accounts from the local banks. This is testimony to how an economy can collapse in a span of just a few months in this financially unstable era!
To crown it all, the accepted view that the crisis shifted from US to Europe may be quite off the mark. Thousands of miles away across the Atlantic, United States continues to struggle to avert a financial crisis and to break the bipartisan gridlock. The honeymoon period of Obama’s second term seems to be over before it even started. Outspoken American economist Paul Craig Roberts predicted a collapsing economy for his country, which will be augured by America crossing swords with Russia and China. His compatriot Michael Hudson advocated on the same lines that the wars will ruin America’s last line of defense – in fact, the only gain in wars is the rising debt, which can never be paid. Quite a few local municipalities in US are close to being bankrupt. The ‘endangered’ list includes New York, San Diego, San Jose, San Francisco, Los Angeles, Washington and many more.
The nation is perilously close to reaching its debt ceiling of $16.39 trillion early next year; which will lead to an impasse, since the Republicans are not budging on the question of raising the ceiling. This could mean large spending cuts for the Obama administration; which could be potentially disastrous for an economy that continues to struggle with a deficit of around $1.06 trillion at the government level.
One really hopes that the Republicans will not use their influence at the House of Representatives (243 Republicans vs 191 Democrats) to stall the proposal to raise the debt ceiling, which will be necessary to keep US on track to recovery. If America retreats into a recession phase at this stage, it will be disastrous for the shaky global recovery we have been witnessing. It’s time for a display of unity, at least on that front, for a start.
By:- Sayan Ghosh
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