U.S. Senate Put America in Pre-Default Status

American senators ruined their president’s weekend. On Friday, they refused a bill already approved by the House of Representatives that would have allowed the American government’s debt limit to be raised and would have ensured a significant reduction in governmental spending. For several months Barack Obama has handled Congress much like the fairy godmother from the movie Cinderella: he “ran about, doted on them and charmed them,” and finally reached his goal, though it is true that it cost him enormous concessions.

Instead of reaching an agreement between uncooperative lawmakers, the U.S. president had to agree to a plan to decrease budgetary expenses over the course of ten years by $3.75 trillion ($500 billion of it in short order). First and foremost, social programs and defense spending had to be sacrificed, which up until now had been untouchable.

It would seem that they should be able to reach a consensus and move the threat of technical default on U.S. government debts from August 2 to a more remote date. But, no. According to the Wall Street Journal, the Senate rejected the bill by a small margin of five votes on Friday. So the threat of default rises with new force. Furthermore, experts have actually begun to talk about bankruptcy.

“I hope that the sides will come to an agreement. There is still time before August 2 to find a compromise,” said the head of the analytical department of the Russian Capital Bank, Dmitri Zelinsky. “Although three months ago I basically rejected the idea that even a technical default by the U.S. was possible, in recent times such thoughts have occurred to me. But, of course, this is an unlikely scenario.”

The director of the Center for Macroeconomic Research BDO in Russia, Elena Matrosova, also emphasized that a default is an unprecedented step that would be complex for Americans to solve.

“This issue is not just America’s. This is an issue for the global economy because a very large number of world participants are connected to the American markets where treasuries comprise a highly liquid market. Destabilization touches all countries. If a solution is not reached, the consequences will affect the global expanse and it stands to reason that the non-financial sector and social media will fall. Therefore, as I see it, the dialogue will continue,” Matrosov said.

In her opinion, the senators have simply been taking their time in order to adapt to the situation and understand how to further handle it, though at the last minute she expects them to agree to raise the debt ceiling.

“We expect that the debt ceiling will be raised,” stated the head economist of Deutsche Bank, Yaroslav Lisovolik. “Though today’s decision is a very negative facto which says that further delaying of the problem to the very last minute is possible. Americans will carry expenses that are too high if a solution is not reached.”

Incidentally, instability and expenses due to indecisiveness by the senators await everyone.

“The fact that Congress has rejected the bill is a negative sign for the markets. Certainly the euro will strengthen against a backdrop of the recently adopted plan to save Greece,” Dmitri Zelinsky predicted.

But even if the senators reach a solution at the last minute, U.S. debt problems will not disappear. As soon as the beginning of next year the country could again find itself facing the issue of raising the debt ceiling.

Elena Matrosova is sure that there are two possibilities for the situation’s development. First, the situation could be untangled, which could take a long time, as is the case with the Japanese living in stagnation with their many debts. Second, there could be an actual decision to default, which would mean that Americans would only lose.

“For financial institutions and central banks around the world that invest money in American treasury bonds, the consequences will be catastrophic. One can only guess at the magnitude of the damage to the financial market, insurance companies, pension funds, and banks. On account of globalization, everything will crash, and Americans will come out of the situation with the biggest gold reserves, and yet at the same time cleaned out because of debts,” affirmed Elena Matrosova.