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Will ‘artificially imposed crises’ have consequences for U.S. economic standing?

As lawmakers show signs of progress towards a deal to end the shutdown and raise the debt ceiling, how are global markets responding? Ray Suarez gets analysis from Zanny Minton Beddoes of The Economist on the effects that repeated political standoffs over may have on U.S. financial credibility.

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    Now to how the world's financial markets view the shutdown and potential debt crisis.

    Asian and European markets closed modestly lower today, with Wall Street ending the day slightly up. But officials in Washington this weekend for World Bank and International Monetary Fund meetings have worried aloud about what a U.S. default could do to the global economy.

    Ray Suarez has the story.


    To walk us through investors' reactions, we turn to ZANNY MINTON BEDDOES, economics editor of The Economist magazine and a former economist with the International Monetary Fund.

    Zanny, welcome back.

  • ZANNY MINTON BEDDOES, The Economist:

    Great to be here.


    Markets around the world didn't fall, didn't shed big amounts of value. Some were a little up. Some were a little down. Were they assuming that this was going to get worked out?


    Yes, absolutely.

    I think what you have seen in the last few days and weeks in global financial markets is the fact that the government shutdown itself, while unbelievably frustrating and painful for the people involved, wasn't itself going to wreck the economy.

    What financial markets worried about was the potential of a default if the debt ceiling was breached. And I think the assumption financial market investors have all along made is that, at the last minute, there would be some agreement which would push the debt ceiling forward. And that seems to be what we're getting tonight.

    And that's why I think you haven't seen a big reaction. If, for some reason, this emerging deal were to fall apart and we were to get to Thursday the 17th or beyond, I think then you would start seeing some very serious movements in financial markets.


    Over the last 72 hours, there were some elected officials in Washington saying this was survivable, and central bankers and finance ministers saying this was a cataclysm.


    I think that if the United States defaulted on its debt, which is not automatic even after October 17, but it's a possibility because down the road if we were to go that way, the U.S. wouldn't be able to make good on all its payments — it might have to choose.

    But if it were to default, that would be a huge global catastrophe, financial catastrophe. And I think the central bankers and finance ministers who were in Washington last weekend were very focused on, even if it was a very small risk, the risk of that possibility. And I think they came to Washington and they were kind of scratching their heads, but they couldn't really understand what was going on, on Capitol Hill.

    To most people from outside the U.S., it's kind of bizarre. You just can't really understand that a country's politicians could take a standoff to a point where they might voluntarily default. So they couldn't understand it, but they were worried about being part of really cataclysmic consequences.

    And I think Christine Lagarde of the — the managing director of the IMF, she put it rather well, and she said that people were bemused, confused, but amused.


    There have been repeated trips to the precipice, these 11th-hour negotiations, standing on the edge of the cliff. Does that erode confidence in U.S. institutions, perhaps even in the U.S. currency as the world's reserve currency?


    You know, that is an interesting question.

    And I think the answer has to be, looking back on what we have had hitherto, that it hasn't. The Treasury market is the biggest, most liquid asset market in the world. The Treasury is the safe — world's safest asset. The dollar is the world's reserve currency. If you actually look over the last few years, the currency that central bankers have got less of is the euro, which has had a real debt crisis

    But, that said, I think it's a bit too sanguine to assume that the U.S. can serially go through this process of having artificially imposed crises, one after the other, with the uncertainty that that creates, without having any consequences over time. And I think what worries me is that this isn't just a one-shot deal or a two-shot deal.

    We're in this — this seems to be the new normal that we go from one artificial deadline to another. One huge drama is solved at the last minute, temporarily. And if that is the way that the U.S. conducts business, I think that not only does it make it hard for U.S. policy-makers to tell other countries how to — what sensible policy is like, it also reduces their standing, and the uncertainty is bad for the world economy and bad for the U.S.


    Well, here we are, perhaps looking at another 90 or 120-day cycle. Does this become different at some point, as you suggest?


    You know, I hope it does.

    I think most people who are who don't have ideological axes to grind know that the U.S. has some fiscal issues in the medium to long term. It has to do something about entitlements. The population is aging. The baby boomers are aging. It could usefully reform its tax code. There are important things to be done.

    But the U.S. doesn't have a short-term debt crisis of the sort that Greek had. It doesn't need draconian spending cuts in the short term. It needs a big budget deal. And so there is a much better alternative out there than where we are, which is short-term cuts and going from one crisis to the other.


    ZANNY MINTON BEDDOES of The Economist, thanks a lot.


    My pleasure.