It was not too long ago when the economy of Cyprus flirted with the danger of going 'bankrupt'! Despite being barely a US$ 23 bn economy, the possibility of sovereign bankruptcy sent shivers down global markets. Imagine if that were to happen with a US$ 15.6 trillion economy! The largest and most powerful in the world! Yes, we are indeed referring to the US and its abysmal state of affairs.
Now consider the statistics. Cyprus had fiscal deficit of 4.9% and bank assets comprised 716% of its GDP in 2012. The US had fiscal deficit of 7% and bank assets comprised nearly 170% of its GDP in 2012 (including off balance sheet items). In fact the top 6 banks in the US alone cornered assets valued at 93% of its GDP. The risk of debt default and collapse of the banking system in the US is therefore hardly worth neglecting.
But that is exactly what the Obama government has been doing so far. Infatuated to the US Fed's money printing policies, the government kept ignoring the warnings of debt ceiling. The debt ceiling limit of US$ 16.699 trillion was breached in May 2013 itself. However, the Treasury chose to adopt extraordinary measures to keep paying its bills. Until the US government finally pulled down the shutters this week, for the first time in 17 years. To get out of this situation, the US government will have to make drastic cut in expenditure or raise taxes or both. In the worst case, it will have to default on debt obligations, which could also lead to a Cyprus-like sovereign crisis. The downside of being the largest economy in the world is that a Cyprus-like bailout will be very difficult for the US to come through.
Thus whether or not the US does a 'Cyprus', the US' debt ceiling is itself an alarm bell for the world economy. Traditionally the US has been able to borrow cheap in the international markets. But a default could damage confidence and drive up the cost of borrowing for Americans. The ripple effect could create a chaotic situation in the international debt market as well.
Investors therefore need to make not just their stocks and gold but also their debt investments with extreme caution. The word 'impossible' can no longer be associated to the risks in global and domestic economy.
Now consider the statistics. Cyprus had fiscal deficit of 4.9% and bank assets comprised 716% of its GDP in 2012. The US had fiscal deficit of 7% and bank assets comprised nearly 170% of its GDP in 2012 (including off balance sheet items). In fact the top 6 banks in the US alone cornered assets valued at 93% of its GDP. The risk of debt default and collapse of the banking system in the US is therefore hardly worth neglecting.
But that is exactly what the Obama government has been doing so far. Infatuated to the US Fed's money printing policies, the government kept ignoring the warnings of debt ceiling. The debt ceiling limit of US$ 16.699 trillion was breached in May 2013 itself. However, the Treasury chose to adopt extraordinary measures to keep paying its bills. Until the US government finally pulled down the shutters this week, for the first time in 17 years. To get out of this situation, the US government will have to make drastic cut in expenditure or raise taxes or both. In the worst case, it will have to default on debt obligations, which could also lead to a Cyprus-like sovereign crisis. The downside of being the largest economy in the world is that a Cyprus-like bailout will be very difficult for the US to come through.
Thus whether or not the US does a 'Cyprus', the US' debt ceiling is itself an alarm bell for the world economy. Traditionally the US has been able to borrow cheap in the international markets. But a default could damage confidence and drive up the cost of borrowing for Americans. The ripple effect could create a chaotic situation in the international debt market as well.
Investors therefore need to make not just their stocks and gold but also their debt investments with extreme caution. The word 'impossible' can no longer be associated to the risks in global and domestic economy.
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