Global Economy: Stakes start rising over Washington gridlock

Mon Oct 7, 2013 8:06am EDT
 
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By Alan Wheatley

LONDON (Reuters) - The world is watching Washington's showdown over the federal budget and debt ceiling with the same feelings of horror, disbelief and ghoulish fascination that a slow-motion car crash produces.

The Republican-led House of Representatives is on a collision course with the Democratic White House. Both sides know the damage that would be inflicted on the country if the Treasury runs out of money later this month, risking an unprecedented debt default.

So one of them is sure to blink and swerve away. Aren't they?

Well, they haven't yet. Hard-line Republicans opposed to Obama's healthcare reform have already forced a shutdown of non-essential government functions since October 1 by blocking new spending authority.

"They're doing that, I would say, at the great expense of the average American, the U.S. economy and, to some degree, the global economy," said Jason Ware, chief analyst at Albion Financial Group in Salt Lake City.

After media reports that House Speaker John Boehner would work to avoid default, even if it meant relying on the votes of Democrats, as he did in August 2011, Boehner stressed that his party would continue to insist on budget cuts as a condition of raising the borrowing authority.

For the issuer of the world's reserve currency, whose interest rates form a global benchmark, to default would be nothing short of catastrophic, according to the U.S. Treasury.

That is why investors, though they have been selling stocks as a precaution, still believe a deal will be struck.   Continued...

 
A general view of the U.S. Capitol Dome in Washington, October 4, 2013. REUTERS/Jonathan Ernst