POLITICS - The U.S. Financial Hostage Crises, World View

"World Leaders Press the U.S. on Fiscal Crisis" by ANNIE LOWREY and NATHANIEL POPPER, New York Times 10/13/2013

Leaders at World Bank and International Monetary Fund meetings on Sunday pleaded, warned and cajoled: the United States must raise its debt ceiling and reopen its government or risk “massive disruption the world over,” as Christine Lagarde, the fund’s managing director, put it.

The fiscal problems of the United States overshadowed the official agendas for the meetings, with representatives from dozens of countries — including two of Washington’s most important economic partners, Saudi Arabia and China — publicly expressing worries about what was happening on Capitol Hill and in the White House.

The leaders came to Washington to talk about the international recovery, Ms. Lagarde said in an interview on the NBC News program “Meet the Press.”  “Then they found out that the debt ceiling was the issue,” she added.  “They found out that the government had shut down and that there was no remedy in sight.”

“So it really completely transformed the meeting in the last few days,” Ms. Lagarde said.

With only three days left before a potential default, Senate leaders failed on Sunday to reach agreement on a plan to reopen the government and raise the debt limit.

Many leaders at the World Bank and I.M.F. meetings said they believed the impasse would be resolved before Thursday, when the government would be at severe risk of not having enough money to pay all its bills on any given day going forward.

But they pressed Treasury Secretary Jacob J. Lew and the Federal Reserve chairman, Ben S. Bernanke — who were both at the I.M.F. meeting — on the issue, predicting that even a near-default would lead to higher borrowing costs and a slowdown of the global economy.

“This cannot happen, and this shall not happen,” Baudouin Prot, chairman of the French bank BNP Paribas, said at a meeting of the Institute of International Finance also being held in Washington.  “The consequences of this would be absolutely disastrous.”

Mr. Lew acknowledged the threat. “Our work begins at home,” he said.  “We recognize that the United States is the anchor of the international financial system.  With the deepest and most liquid financial markets, when risk rises, the flight to safety and to quality brings investors to U.S. markets.  But the United States cannot take this hard-earned reputation for granted.”

Participants at the meetings remained on edge, given the gravity of the threat.  Ms. Lagarde said “that lack of certainty, that lack of trust in the U.S. signature” would disrupt the world economy.

Wolfgang Schäuble, the German finance minister, issued his own urgent appeal.  “The fiscal standoff has to be resolved without delay,” he said in a statement released by the I.M.F.

Jamie Dimon, the chief executive of JPMorgan Chase, painted a bleak picture of the days ahead if there is no resolution.

“As you get closer to it, the panic will set in and something will happen,” Mr. Dimon said at the international institute event.  “I don’t personally know when that problem starts.”

He added that JPMorgan had been “spending huge amounts of time and money and effort to be prepared.”

Many of the high-ranking officials present in Washington for the meetings made open appeals to Congress, with warnings coming from many of Washington’s allies and creditors.  Ms. Lagarde’s counterpart at the World Bank, the American physician Jim Yong Kim, said the world was “days away from a very dangerous moment.”

“The closer we get to the deadline the greater the impact will be for the developing world,” he said.

Fahad Almubarak, governor of the Saudi Arabian Monetary Agency, said “urgent political agreements on budget and debt issues are necessary to preserve and, indeed, reinforce the modest recovery.”  And Yi Gang, an official with China’s central bank, said the fiscal uncertainties “must be addressed promptly.”

Concern over the impasse has already led to a slide in stocks — including the worst two-day dip in months.  American economic confidence has taken the worst hit since the collapse of Lehman Brothers in 2008.  And investors have dumped certain short-term Treasury debt because of fears that the Treasury might not pay them back on time.

Markets ended last week with a burst of optimism, after House Republicans took the first steps toward a compromise.  But that optimism faded over the weekend.  On Sunday, with negotiations in the Senate stalled, the value of the dollar was sliding.

In the Asia-Pacific region early Monday, stock markets moved lower in Singapore, Taiwan and Australia. Markets in Hong Kong and Japan were shut for holidays.

On Monday, all eyes in the American and European markets will be focused on the negotiations in Congress.  Big American companies will announce their quarterly results this week, normally a significant event for Wall Street.  But that is likely to attract little attention until the political negotiations are settled.

There has been much debate about how quickly problems will ripple through the economy before and after the deadline.  The Treasury Department will continue to take in money and might be able to pay its bills for as long as two weeks.  Some House Republicans have said that even if the Treasury misses some payments, it will have enough money to avoid defaulting on its debt, the most frightening outcome for financial markets.

The I.M.F., which lends to governments that have trouble finding financing on the sovereign debt markets, said it had been planning for any market disruptions.  Mr. Kim of the World Bank said that the United States’ flirtation with default in 2011 raised borrowing costs for many poor countries.

Much of the attention has been on the enormous outstanding pool of Treasury bonds and bills.  Short-term government bills are used to grease the wheels for many financial transactions and provide a benchmark from which other assets are priced.  If the value of that debt was suddenly drawn into question, markets could quickly seize up.

Money market funds, the popular mutual funds that own large amounts of Treasury bills, have been selling those that are scheduled to pay out in late October and November.

Anshu Jain, the co-chief executive of Deutsche Bank, said on the international institute panel that his executive team had been trying to make contingency plans in case of a default, but it had struggled to come up with measures that would significantly stem the losses.

“You don’t want to go into all of it,” he said.  “This would be a very rapidly spreading fatal disease.”