29 july 2011
If the United States suddenly stiffed its creditors, the impact would be so widespread, complex and unpredictable that it is next to impossible to shield against steep losses, experts say. A default could cause turmoil in the stock and bond markets, plus a replay of the fear that froze lending in the depths of the 2008 financial crisis. In the chaos, investments you'd think were a sure bet to fall might rise instead, and vice versa.
If an agreement is not reached by Aug. 2, the U.S. won't have enough cash to pay all its bills. That could have a huge impact on financial markets. The U.S. would likely lose its coveted triple-A credit rating. Interest rates would rise for millions of consumers. And stocks could fall the way they did during the 2008 financial crisis, analysts say.
Currently, about 40 cents of every dollar spent by the U.S. government is borrowed. Lawmakers are divided over how to get the U.S. government accounts into a healthier state in the longer term.
Even if a deal is reached, there are fears the U.S. could still lose its top credit rating. A downgrade would cost the federal government an extra $100 billion in interest payments a year.
Obama has next year's elections in mind
US President Barack Obama wants to raise revenues by letting tax cuts for wealthy Americans expire. Republicans have pushed for more spending cuts and have rejected higher taxes.
In a solemn late night address to the nation, the President hit out at what he called a "dangerous game" being played by rival Republicans with the two sides deadlocked over a deal to raise the debt ceiling by August 2. "We can't allow the American people to become collateral damage to Washington's political warfare," Obama said Monday in his White House address, and warning of a "deep economic crisis" if the US defaults.
For weeks Obama's Democratic allies have been at loggerheads over a deal with Republicans, who control the House of Representatives, to raise the $14.3 trillion debt ceiling and agree on ways to cut the ballooning US deficit.
Republicans have called for a raft of deep spending cuts -- which Obama has agreed to -- but emboldened by newly elected arch-conservative Tea Party.
lawmakers they have refused the president's calls for matching revenue increases from the nation's wealthiest.
IMF Chief has warned a default "would be a very, very, very serious event. Not for the United States alone, but for the global economy at large."
Economy to suffer
Without signed legislation by Aug. 2, the Treasury will not have enough funds to pay all the nation's bills. Administration officials have warned of potentially calamitous effects on the economy if that happens — a spike in interest rates, a plunge in stock markets and a tightening in the job market in a nation already struggling with unemployment over 9 percent.
Many analysts expect U.S. leaders to reach a last-minute deal to raise the government's $14 trillion borrowing limit before an Aug. 2 deadline. But markets are watching anxiously for what tax or spending changes might be part of the settlement. A default could mean the U.S. government could not pay all its bills starting next month, including interest and principal on Treasury bonds. That would cause shockwaves through the global economy and financial markets.
Stocks sink as Wall Street slumps
Wall Street has suffered big losses as Congress struggled to break its long gridlock. Many investors are reluctant to buy stocks because of concerns over the budget impasse in Washington.
The Dow has fallen five straight days because of worries that the U.S. might default on its debt if Congress doesn't raise the country's borrowing limit. It's down more than 484 points, or 3.8 percent. Just five days remain until the Treasury Department says the government won't have enough money to cover all of its bills.
Even if the U.S. doesn't default, investors worry that the country might lose its triple-A credit rating. That could raise interest rates and possibly slow the U.S. economy, which is still recovering from the worst recession in decades.
Stock trading has varied widely in July because of concerns over debt problems in the U.S. and Europe. The VIX, a measure of volatility in U.S. stock prices, has risen 16 percent in July.
Trading volume, or the number of shares bought and sold on a given day, has fallen 22 percent in July on the New York Stock Exchange compared with the same month a year ago, according to FactSet. If that continues, July will have the lowest average daily volume since December 2007.
Treasury Bonds:
Interest rates on Treasury bonds will rise the closer Washington gets to missing a debt payment. Investors would demand higher rates because of the greater risk they wouldn't get their money back.
But some bond traders are betting the opposite will happen. They think nervous money managers could rush into Treasurys if Washington blows past the Aug. 2 deadline to raise the debt ceiling. The buying would push interest rates lower.
The logic behind this seemingly illogical reaction: Treasurys are widely traded around the world, with plenty of buyers and sellers ready at a moment's notice, a quality known as liquidity. Investors like that, especially in a crisis, and may overlook fears of missed payments.
Some investors are seeking protection in credit default swaps, the insurance policies that pay off if a company or country defaults on its debt. The cost of buying protections against a U.S. default has been rising fast, reflecting high investor demand. To insure $10 million worth of Treasurys for a year, investors now have to pay almost $50,000 — double what it would have cost them just two months ago. That's about what it costs to insure an equal amount of bonds issued by Russia.
Gold hits new high:
Gold prices are at record high because debt problems in the U.S. and Europe are making two other so-called safe havens, the dollar and the euro, seem shaky. Gold's rise has accelerated in the last two weeks. Gold has also steadily risen since the start of 2009, when it cost $880. The Federal Reserve has kept short-term interest rates at a record low of nearly zero since December 2008. Low interest rates weaken the appeal of the dollar, and that in turn sends gold higher.
Why own gold? It's because gold has a long history as a way of preserving wealth. Investors believe gold is safe because it doesn't depend on a government's ability to repay a bond, like a Treasury or a Greek note. Neither do other commodities like crude oil, which has the added use of powering automobiles.
The amount of gold held by exchange-traded funds and similar investments is at a record, according to Barclays Capital. Exchange-traded funds, also known as ETFs, trade like stocks and are a way for investors to own gold without having to store and insure actual gold bars or coins.
Investors are piling into gold on fears of a U.S. default, pushing the metal on Monday to $1,612 per troy ounce. But unlike a lot of metals, including silver and copper, there are few commercial uses for gold. That makes it difficult to guess just how much it really is worth, and whether the price rally will continue. But its high price is a good indicator of how scared people are.
Dollar tumbles
The dollar is fast losing its value. Singapore dollars, Canadian dollars, Brazilian reals and Australian dollars are in demand. The bet is that as the U.S. struggles to pay its debts, more investors will put money in these countries, lifting the value of the currencies.
Gold rose 21 percent in dollar terms in the 12 months through June 30, according to the World Gold Council, an industry group. It rose against other currencies, too: up 2.2 percent in euros, 10.4 percent in Japanese yen and 16.5 percent in Indian rupees. But gold fell 5.5 percent against the Swiss franc, which is seen as one of the world's safest currencies.
Indian rupee hits three year high
The Indian rupee recently hit a three-year high against the US dollar. The rupee touched 43.85 - in intra-day trade - a level last seen on August 29, 2008 when the rupee had hit a high of 43.71. In the New York market, the US dollar has seen a fall against a wide range of currencies, touching a record low against the Swiss franc and near a recent low versus the Japanese Yen.
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Dr Sanjay Kumar Cardiac Cardiothoracic Heart Surgeon India The U.S. could default on its debt on August 2 if Congress and the White House don't agree to raise the country's borrowing limit. If a deal is not reached by then, the government won't have enough cash to pay all its bills and could default on its debt.
If the United States suddenly stiffed its creditors, the impact would be so widespread, complex and unpredictable that it is next to impossible to shield against steep losses, experts say. A default could cause turmoil in the stock and bond markets, plus a replay of the fear that froze lending in the depths of the 2008 financial crisis. In the chaos, investments you'd think were a sure bet to fall might rise instead, and vice versa.
If an agreement is not reached by Aug. 2, the U.S. won't have enough cash to pay all its bills. That could have a huge impact on financial markets. The U.S. would likely lose its coveted triple-A credit rating. Interest rates would rise for millions of consumers. And stocks could fall the way they did during the 2008 financial crisis, analysts say.
Currently, about 40 cents of every dollar spent by the U.S. government is borrowed. Lawmakers are divided over how to get the U.S. government accounts into a healthier state in the longer term.
Even if a deal is reached, there are fears the U.S. could still lose its top credit rating. A downgrade would cost the federal government an extra $100 billion in interest payments a year.
Obama has next year's elections in mind
US President Barack Obama wants to raise revenues by letting tax cuts for wealthy Americans expire. Republicans have pushed for more spending cuts and have rejected higher taxes.
In a solemn late night address to the nation, the President hit out at what he called a "dangerous game" being played by rival Republicans with the two sides deadlocked over a deal to raise the debt ceiling by August 2. "We can't allow the American people to become collateral damage to Washington's political warfare," Obama said Monday in his White House address, and warning of a "deep economic crisis" if the US defaults.
For weeks Obama's Democratic allies have been at loggerheads over a deal with Republicans, who control the House of Representatives, to raise the $14.3 trillion debt ceiling and agree on ways to cut the ballooning US deficit.
Republicans have called for a raft of deep spending cuts -- which Obama has agreed to -- but emboldened by newly elected arch-conservative Tea Party.
lawmakers they have refused the president's calls for matching revenue increases from the nation's wealthiest.
IMF Chief has warned a default "would be a very, very, very serious event. Not for the United States alone, but for the global economy at large."
Economy to suffer
Without signed legislation by Aug. 2, the Treasury will not have enough funds to pay all the nation's bills. Administration officials have warned of potentially calamitous effects on the economy if that happens — a spike in interest rates, a plunge in stock markets and a tightening in the job market in a nation already struggling with unemployment over 9 percent.
Many analysts expect U.S. leaders to reach a last-minute deal to raise the government's $14 trillion borrowing limit before an Aug. 2 deadline. But markets are watching anxiously for what tax or spending changes might be part of the settlement. A default could mean the U.S. government could not pay all its bills starting next month, including interest and principal on Treasury bonds. That would cause shockwaves through the global economy and financial markets.
Stocks sink as Wall Street slumps
Wall Street has suffered big losses as Congress struggled to break its long gridlock. Many investors are reluctant to buy stocks because of concerns over the budget impasse in Washington.
The Dow has fallen five straight days because of worries that the U.S. might default on its debt if Congress doesn't raise the country's borrowing limit. It's down more than 484 points, or 3.8 percent. Just five days remain until the Treasury Department says the government won't have enough money to cover all of its bills.
Even if the U.S. doesn't default, investors worry that the country might lose its triple-A credit rating. That could raise interest rates and possibly slow the U.S. economy, which is still recovering from the worst recession in decades.
Stock trading has varied widely in July because of concerns over debt problems in the U.S. and Europe. The VIX, a measure of volatility in U.S. stock prices, has risen 16 percent in July.
Trading volume, or the number of shares bought and sold on a given day, has fallen 22 percent in July on the New York Stock Exchange compared with the same month a year ago, according to FactSet. If that continues, July will have the lowest average daily volume since December 2007.
Treasury Bonds:
Interest rates on Treasury bonds will rise the closer Washington gets to missing a debt payment. Investors would demand higher rates because of the greater risk they wouldn't get their money back.
But some bond traders are betting the opposite will happen. They think nervous money managers could rush into Treasurys if Washington blows past the Aug. 2 deadline to raise the debt ceiling. The buying would push interest rates lower.
The logic behind this seemingly illogical reaction: Treasurys are widely traded around the world, with plenty of buyers and sellers ready at a moment's notice, a quality known as liquidity. Investors like that, especially in a crisis, and may overlook fears of missed payments.
Some investors are seeking protection in credit default swaps, the insurance policies that pay off if a company or country defaults on its debt. The cost of buying protections against a U.S. default has been rising fast, reflecting high investor demand. To insure $10 million worth of Treasurys for a year, investors now have to pay almost $50,000 — double what it would have cost them just two months ago. That's about what it costs to insure an equal amount of bonds issued by Russia.
Gold hits new high:
Gold prices are at record high because debt problems in the U.S. and Europe are making two other so-called safe havens, the dollar and the euro, seem shaky. Gold's rise has accelerated in the last two weeks. Gold has also steadily risen since the start of 2009, when it cost $880. The Federal Reserve has kept short-term interest rates at a record low of nearly zero since December 2008. Low interest rates weaken the appeal of the dollar, and that in turn sends gold higher.
Why own gold? It's because gold has a long history as a way of preserving wealth. Investors believe gold is safe because it doesn't depend on a government's ability to repay a bond, like a Treasury or a Greek note. Neither do other commodities like crude oil, which has the added use of powering automobiles.
The amount of gold held by exchange-traded funds and similar investments is at a record, according to Barclays Capital. Exchange-traded funds, also known as ETFs, trade like stocks and are a way for investors to own gold without having to store and insure actual gold bars or coins.
Investors are piling into gold on fears of a U.S. default, pushing the metal on Monday to $1,612 per troy ounce. But unlike a lot of metals, including silver and copper, there are few commercial uses for gold. That makes it difficult to guess just how much it really is worth, and whether the price rally will continue. But its high price is a good indicator of how scared people are.
Dollar tumbles
The dollar is fast losing its value. Singapore dollars, Canadian dollars, Brazilian reals and Australian dollars are in demand. The bet is that as the U.S. struggles to pay its debts, more investors will put money in these countries, lifting the value of the currencies.
Gold rose 21 percent in dollar terms in the 12 months through June 30, according to the World Gold Council, an industry group. It rose against other currencies, too: up 2.2 percent in euros, 10.4 percent in Japanese yen and 16.5 percent in Indian rupees. But gold fell 5.5 percent against the Swiss franc, which is seen as one of the world's safest currencies.
Indian rupee hits three year high
The Indian rupee recently hit a three-year high against the US dollar. The rupee touched 43.85 - in intra-day trade - a level last seen on August 29, 2008 when the rupee had hit a high of 43.71. In the New York market, the US dollar has seen a fall against a wide range of currencies, touching a record low against the Swiss franc and near a recent low versus the Japanese Yen.
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