The continuing uncertainty about the US budget and debt ceiling can severely dent international markets, according to Doha Bank group CEO Dr R Seetharaman (pictured).
Finding that the US debt limit is currently at almost $17tn; he also said if it is not raised, the world’s largest economy would “officially go bankrupt” by October 17.
“If the worst happens, international markets could collapse and the dollar could go into a free-fall, as could the attractiveness of US government bonds,” he told the International Monetary Fund (IMF) meeting, which concluded with warning on the US debt ceiling and domino impact in global growth and markets.
Seetharaman’s views come at a time when Senate Democrats and Republican leaders are inching closer to strike a deal to end the US budget impasse.
A failure to lift the debt ceiling, according to him, would prompt rating agencies to automatically downgrade the credit rating of the US. The latest edition of IMF’s Global Financial Stability Report has stated markets had become riskier over the past six months as investors began to adjust to the prospect of the withdrawal of the Federal Reserve’s $85bn-a-month programme, he said.
Under its “adverse scenario”, global interest rates would jump abruptly, causing turmoil across world financial markets, Seetharaman added.
“The global capital markets will witness massive a sell-off. The commodities will fall on concerns over slower growth in the US economy, which could result in global slowdown,” he cautioned.
IMF chief Christine Lagarde was of the view that unless the US finds a way out of the budget deadlock, the global economy could witness another recession, a warning that came after G20 finance ministers and central bankers asked Washington to take “urgent action to address short-term fiscal uncertainties.”
Quoting the IMF’s latest World Economic Outlook (WEO) update, which forecasts that world economy would grow at 2.9% this year; Seetharaman said global growth is still weak and averaged only 2.5 % in the first half, which is about the same pace as in the second half of 2012.
Observing that the US economic growth has been revised down to 1.6% this year; he said the impetus to global growth is expected to come mainly from Washington as fiscal consolidation eases and monetary conditions stay supportive.
He said the growth in the UK and euro region was revised upwards when compared to July 2013 forecast, with growth improvement seen in Germany, France and Spain.
In the euro area, policymakers should develop a strong currency union and clean its financial systems, he said.
Emerging economies growth has been cut to 4.5% from earlier forecast of 5% but growth differs across emerging market and developing economies on tightening capacity constraints, stabilising or falling commodity prices, less policy support and slowing credit after a period of rapid financial deepening, he said.
“It is expected that in the near future activity will continue to pick up in the advanced economies, however growth in emerging economies will be modest,” according to Seetharaman.
Many emerging market and developing economies face a trade-off between macroeconomic policies to support weak activity and those to contain capital outflows, he said, adding the exit of monetary policies by advanced economies can challenge emerging economies growth.
Finding that the Middle East and North Africa growth forecast was cut to 2.1% from the earlier July 2013 estimate of 3%; Seetharaman said growth in some economies in the region remains “weak because of difficult political and economic transitions.”