'Political deadlock could impact credibility of US dollar'
Dubai: The current political deadlock over the US budget and debt ceiling could impact the credibility of the US dollar, a leading bank in the Gulf region has said.
About 800,000 federal workers in the US have been told to stay at home while national parks, museums, government buildings and services shutdown as a result of the deadlock.
According to Qatar National Bank Group, the likelihood that this political deadlock continues past the October 17 deadline is small, given its catastrophic implications for the US and the world economy.
However, the credibility of the US dollar as the world reserve currency could be tarnished.
In addition, the deadline of October 17, 2013 to increase the US debt ceiling in order to avoid an unprecedented default on US government debt is fast approaching.
The political deadlock over the US budget is likely to have a small and temporary effect on US economic growth.
The lack of a political compromise over the US budget has meant that the corresponding appropriations for various government services were not approved by October 1, the start of the new fiscal year.
Once Congress fails to appropriate funds, the US government has to shutdown (with the exception of essential services) as it is unable to pay for its employees or goods and services.
Government shutdowns are disruptive but not uncommon in the US, as they have been used in the past to force either political party to concede on key policy measures.
In light of these catastrophic consequences, QNB Group expects that Congress will pass a new budget and increase the debt ceiling in the coming days.
Nevertheless, the political deadlock over the last couple of weeks has created an atmosphere of uncertainty that could affect confidence, investment and growth in the US.
More importantly, the credibility of the US dollar as the world's reserve currency could be affected, as global investors seek to mitigate the risk of a future political deadlock.
Overall, without political collective commitment, it is unlikely that the US dollar will continue to remain the world's reserve currency.
The deadlock over the US debt ceiling is different and significantly more dangerous. A default on US government debt would be catastrophic for American and world economy.
Ratings agencies would automatically need to classify all US government debt in default. This would force institutional investors around the world, including central banks, to sell their holdings of US government bonds, as they have statutory requirements to hold only investment- grade assets.
The US would then no longer be able to rollover a large portion of its debt, let alone issue new ones.
For the US economy, the lack of debt instruments to finance government spending would mean reneging on its other obligations like Social Security, medical payments etc.
A large portion of the US economy would therefore grind to a halt. For the world economy, it would imply a loss of the reserve currency that anchors the global financial system, with severe instability in exchange and bond markets. This would inevitably result in a sharp global recession.