NEW DELHI: 'Irresponsible America' is keeping the world on a ledge. Will it raise the debt ceiling, or will it default? It will reach a last-minute agreement, feel most analysts. But there is a 5 in 1 chance that the world's largest economy decides to default, says Byron Wien, VC at Blackstone Advisory.
"There is a 20 per cent probability that the US government will default on its debt," he told ET Now in an exclusive interview.
The implications are being discussed the world over, but so far there is no clear verdict. Will the US Treasury Securities lose their validity? Or will the default be restricted to the US government's domestic obligations? The answers are not in yet.
What started as a bickering between the Donkey and the Elephant (to be read Democrats and Republicans, respectively) over President Obama's highly vaunted healthcare programme has now turned into a battle of wills; and no party is at this stage in a position to stand down.
Last time, at the start of this year when a compromise was negotiated, things were still different as chances of Obamacare not being implemented were still a probability.
But this time a loss-of-face would be evident as part of Obamacare has come into effect.
Someone will have to lose their face this time; or else the repercussions would be felt hard across the world.
"If the US government defaults, it will cause a huge damage to global economy," says ANZ, adding that the probability of the same is low.
"Markets will correct severely if the US government defaults," says Blackstone's Byron Wien.
So now it's a well known fact that in case America defaults, it'll be catastrophic for the world economy. The trillions of dollars worth treasuries being held across the world would lose value.
As a report by the US Treasury department notes: "A default would be unprecedented and has the potential to be catastrophic: credit markets could freeze, the value of the dollar could plummet, and US interest rates could skyrocket, potentially resulting in a financial crisis and recession that could echo the events of 2008 or worse. By looking at the disruptions to financial markets that ensued in 2011."
"The debt ceiling impasse in 2011 contributed to long-lasting scars on financial markets," the report adds.
But if the US decides to raise the ceiling today, the reaction may well be euphoric as last seen when the US decided to postpone QE tapering. The raising of debt ceiling means confirmation on the postponement of QE tapering; and there is an 80% chance of that happening, as Byron Wien said.
It's clear that the impact of whatever happens in the US is expected to be felt across the world markets; but talking specifically about India, Sensex is just about 500 points from hitting its all-time high.
"The implications of a delayed US taper, helped by what's happening in US debt negotiations has till now helped things; and we are seeing flows to emerging markets going up," says Tirthankar Patnaik, Religare Capital Markets.
"The clear point is that this market is continuously moving higher ... it is basically because any kind of shutdown or slowdown globally means tapering gets put off and then emerging markets they get back into flavour," says Ashwani Gujral, Fund Manager, Ashwanigujral.com.
It's been quite some days since the US shutdown on September 30. The army is getting its salary, the space mission is working just fine; only the non-essential staff of the government is facing the heat. They have been promised the amount they have lost, but then that remains just a promise as of now as no-one has any clear signal; and the battle of wills is on.
"It is an ideological fight between the ultra-right wing of Republican party and the President, and they're putting the global economy at risk," says AV Rajwade of AV Rajwade & co.
"I think that's a very irresponsible thing for a country to do," he adds.
India has a total exposure of $59.3 billion to US Treasury Securities, while China and Japan have it at $1.1 trillion each as of July 2013, as per the data available on the official website of the US Department of the Treasury.
"One cannot rule out the possibility of some sort of a technical default before a compromise is reached on debt ceiling," Alastair Newton, Senior Political Analyst, Nomura, told ET Now last week.
"I don't mean a default on the US Treasuries," adds Alastair Newton, "... but that we get across the October 17 deadline and the Treasury has to start being selective about which bills to pay."
America has the 'exclusive privilege' of printing more dollars. It can well do it this time around.
Will America actually default?
"It's very difficult to say at this moment what would happen. There were some hopes some days back that a breakthrough may be coming, but now no-one knows," says Rajwade.
"Everybody expects that there will be a last-minute deal if not a complete deal; at least a postponement where you get a new temporary debt ceiling and then you move from there with the negotiations, etc," says Ashwani Gujral.
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