Top of the Agenda: Investor Fears Rise over U.S. Debt Crisis from the CFR

Top of the Agenda: Investor Fears Rise over U.S. Debt Crisis Investors are looking for alternatives (NYT) to U.S. Treasury bonds as Washington lawmakers remain deadlocked over a plan to raise the nation's $14.3 trillion debt ceiling just five days ahead of an August 2 deadline that could see the U.S. default. Institutional investors are increasingly concerned that if the U.S. defaults – or even has its AAA credit rating downgraded in the absence of a long-term deficit-reduction plan – the value of Treasury securities would plummet, prompting some to invest in a strengthening Swiss franc, and others in rapidly growing emerging markets like China. Following losses on Wall Street at the end of Wednesday, stocks in Europe and Asia (FT) fell sharply after markets opened Thursday. U.S. debt markets faced diminished foreign interest, as yields for insuring U.S. debt rose. While U.S. stock futures made small gains (WSJ) Thursday morning, markets remained focused on Washington's inability to resolve the debt standoff. After much wrangling by congressional Republicans, the House will likely vote Thursday on a two-step plan (Politico) to raise the debt ceiling, a bill that faces significant opposition in the Senate, and one that President Barack Obama has vowed to veto. The $2.5 trillion debt ceiling bill would prevent a default next week but threatens more conflict in six months. Analysis: Whereas a U.S. default triggered by a failure to raise the debt ceiling is the worst possible way to address the country's unsustainable deficits—causing borrowing rates to soar and hurting growth prospects—raising the debt ceiling without a credible deficit-cutting agreement still poses real risks of imminent market turmoil, explain these charts by CFR's Geo-Graphics. As partisan wrangling over the U.S. debt ceiling continues in Washington, fears are mounting that a default could trigger another global economic crisis. This CFR Issue Guide offers timely analysis on the global implications of the U.S. debt crisis. If linked to serious longer-term deficit reduction, a temporary stimulus could well be warranted to boost demand, writes CFR co-chairman and former Treasury secretary Robert Rubin in the Financial Times.

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