The lingering fiscal standoff in the world’s largest economy “transformed” the annual meetings of IMF and the World Bank (Oct 11-12) where Finance Ministers had to shift their focus to the looming threat of a debt default which, unresolved, could cause a “massive disruption the world over”, according to IMF Chief Christine Lagarde.

Financial markets and governments and central banks were putting themselves on alert to the dangers of a default which would instantly hit the dollar with its principal reserve asset status, destabilse the largest economy of USA, the world’s safest anchor, and spread disorder across the globe.

Republicans controlling the House of Representatives, who triggered the shutdown by not passing an interim funding measure for the new fiscal year from October 1, failed to agree to President Obama’s suggestion to reopen government and lift the debt default threat unconditionally. The President made it clear he would not accept any “ransom” for law-makers doing their duty but once they responded as suggested, he would hold wider talks with Congress leaders on budget, tax and other issues.

In the face of stubborn resistance of House Republicans and taking note of grave concerns from world leaders in US capital, the Senate Democrat majority leader and the Republican minority leader held talks and had nearly reached a deal by the night of October 14. This brought a glimmer of hope though doubts remained whether it would go through the Republican-controlled House, with hardly a day or two left for October 17.

On that date, according to the US Treasury, it would become short of funds to meet regular payments of billions of dollars in social security and other entitlements or to honour obligations to investors/foreign creditors on interest and principal repayments. The Senate deal reportedly proposed financing of government till January 15 and raising of debt ceiling till February 7 with formal discussions on long-term tax and spending plans to be concluded by December 13.

The other major issue at the Fund-Bank meetings was the serious risk for emerging markets and other developing country economies from any hasty unwinding of the US Federal Reserve’s monetary stimulus, which could destabilise their currencies. Emerging countries attributed their growth slowdown, to a large extent, on the uncertainties in the global environment including the monetary policy followed in advanced economies.

There is no likelihood of Fed’s planned exit from its quantitative easing, through purchase of US treasury and other assets of 85 billion dollars a month, getting under way till the turn of the year. This may be a safe assumption, even if the damage from the closure, relatively of a short duration, is only marginal for an economy which even otherwise is yet to gain growth momentum.

Reflecting the concerns of emerging nations, the Fund communique said the “eventual transition toward the normalization of (US) monetary policy, in the context of strengthened and sustained growth, should be well timed, carefully calibrated, and clearly communicated”. It also spells out what emerging and other developing countries have to be doing to safeguard against vulnerabilities. It is likely that Governments and Central Banks might well use the time before tapering begins on fiscal balancing and other measures to reduce dependence on financing from abroad.

From the beginning, the Republicans were bent on effecting major changes to the Affordable Healthcare Act of President Obama and wanted to defund the programme in the budget. The Senate Democrats in majority rejected every House bill tinged with such conditions, and insisted on a clean short-term funding. But the Republicans, egged on by the extremist “Tea Party” adherents, were out to play a political game.

As the shutdown dragged into the second week, it had become even more urgent for raising the debt ceiling with not many days left before October 17, the deadline repeatedly notified to the Congress by the Treasury. Republicans first indicated they would accept a short extension but subsequently made it conditional on budget negotiation. They have remained unconcerned about the global implications of a default – a fringe of the party even favoured it as of no consequence.

Meanwhile, the Shutdown, which furloughed hundreds of thousands of workers, closed down national parks and brought scores of federal facilities to a standstill across the nation, entered the third week on October 14.

The President warned the nation in his weekly address that damage to America’s sterling credit rating would “not just cause global markets to go haywire, it would become more expensive for everyone in America to borrow money”. The government is closed for the first time in 17 years and a political party is risking default for the first time since the 1700s, he noted.

If at all the Senate deal gets approval of the Republicans in the House of Representatives, it would be largely because of the overwhelming votes of disapproval of their actions thus far, though the polls do not spare the Democrats or even the President.

G20 Finance chiefs, who also met before the Fund-Bank annual, singled out the United State’s fiscal fight as the most pressing threat to the global economy and urged lawmakers to avoid a destabilizing default of the world’s benchmark debt. The World Bank President Jim Yong Kim also cautioned US lawmakers that inaction before deadline would result in interest rates rising and loss of confidence. That would greatly hurt both the developed and developing economies.

IMF’s policy-making committee, IMFC, in its communique called on the United States “to take urgent action to address short-term fiscal uncertainties”. Budget and policy battles have become a recurrent feature in the American political system and the overriding concern was that the latest fight should not precipitate another global crisis within five years of the financial meltdown 2008 and the Great Recession.

According to noted Harvard economist, Kenneth Rogoff, the current battle over debt ceiling reflects “a deeper constitutional power struggle between the president and Congress”. If left unresolved, it could profoundly weaken the government’s ability to make significant economic decisions in the future, he said. (IPA Service)