World chastises U.S. as debt ceiling looms

October 14, 2013: 12:42 PM ET
debt ceiling
World leaders have called on the United States to resolve its fiscal impasse.
HONG KONG (CNNMoney)

Leaders from around the world have a message for Washington: Raise the debt ceiling, and do it right now.

On this, there is absolute consensus. Leaders from China, Japan, Saudi Arabia, Germany and Singapore have all pleaded for a speedy resolution -- saying that a default by the United States would have a profound effect on their economies.

It's a risk that dominated last week's meeting of the International Monetary Fund in Washington, an event attended by nearly all central bankers and finance chiefs.

"I've just spent the last two days with representatives of about 188 countries around the world ... they are very anxious to see this crisis resolved, because they know it's going to impact their economy," IMF chief Christine Lagarde told CNN.

Many economies around the world are still struggling in the wake of the 2008 financial crisis, and leaders are unnerved by the idea that growth could be reversed by a self-inflicted financial calamity in the U.S.

"The U.S. needs to take urgent action to address short-term fiscal uncertainties," finance ministers and central bankers representing the world's top 20 economies said in a statement after meeting in Washington.

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Economists say that should the U.S. fail to honor its obligations, investors would likely drop the dollar, an event that would stress other currencies. Equity markets would surely take a hit, and transactions pegged to the value of Treasuries would be difficult to execute.

"I think it's very important that the U.S. overcomes its fiscal gridlock otherwise we would have potentially dramatic consequences for the world economy and of course it could also have negative ramifications for the still nascent recovery in Europe," the European Commission's economics chief Olli Rehn said Monday.

Regulators are also watching closely. Hong Kong has already reduced the value of Treasuries used as security for financial trading.

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Market reaction has thus far been muted, but investors could grow more rattled in the run-up to Thursday -- when the Treasury Department has warned it will become difficult to pay all government bills.

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The debt ceiling is a quirk of governance shared by few countries. Denmark and Japan have similar systems but no history of mixing borrowing limits and political brinkmanship. Beyond the immediate financial consequences, the episode has led some to question the U.S. role in the world.

China -- the largest foreign holder of U.S. debt -- has been particularly vocal.

Vice Finance Minister Zhu Guangyao said last week that a solution must be found quickly in order to "ensure the safety of Chinese investments" and provide stability for economies around the globe.

"We ask that the United States earnestly take steps to resolve in a timely way the political issues around the debt ceiling and prevent a debt default," he said. "This is the United States' responsibility."

Xinhua, the country's official news agency, went further, saying in a scathing op-ed that the "pernicious impasse" warrants a move to an "de-Americanized world."

"The cyclical stagnation in Washington for a viable bipartisan solution over a federal budget and an approval for raising debt ceiling has again left many nations' tremendous dollar assets in jeopardy and the international community highly agonized," Xinhua said.

-- CNNMoney's Mark Thompson contributed to this article

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