Debt (cont'd)

by : Caroline Pailliez

WORRISOME

Economists are worried by the impass which American politicians seem to have reached over the ceiling to the US debt.

«Members of Congress need to reach a decision as soon as possible. The official deadline is August 2, but in reality the American President has till next Friday to find a way to up the debt ceiling. Because it could take a few weeks for the various States and members of both political parties to ratify an agreement.» explains Sébastien Lavoie, economist with the Banque Laurentienne.

In a press conference this morning, Barak Obama has given Congress 36 hours to find a solution.

«American Treasury Bonds are used in most financial transactions. The US dollar is the reference currency. If it should strongly devaluate, the whole of the financial system would be severely shaken» claims Carlos Leitao, chief economist for Real Estate, Banque Laurentienne.

«The United States are great borrowers. which means that by creating uncertainty, they worry their creditors, such as China, for example, which could well decide to diversify its holdings.The United States could find it more difficult to finance themselves on the markets», says Paul-André Pinsonneault, chief economist, Banque Nationale groupe financier.

Everyman Affected

In the end, ordinary consummers will bear the brunt of the costs. « If they do not find a way to agree among themselves, American politicians will have the choice to not pay their debtors or to cut directly into programs and raise taxes to find financing, thinks Germain Belzile, research director to the Institut économique de Montréal. Interst rates will rise quickly, which will strain consumption all the more.»

For every dollar expended, the government currently borrows 40 cents. «This means that if they do not finance themselves on financial markets, the US wil lhave to cut 40% of their programs,» adds Mr Lavoie.

A Political Game

«Upping the debt ceiling is something the government does regularly. But never with such difficulty. With press conferences and public interventions, Barack Obama is putting supplementary pressure on Republicans» feels Mr Belzile.

The Republicans wish to reduce expenses by 2 400 billion dollars US in exchange for their accord with upping the debt ceiling, without having to augment taxes for the better off in the bargain.