Mon, Jul 18, 2011 - Page 10 News List

ANALYSIS: Debt cap failure would rock US economy

ROCK ‘N’ ROLL:An economist said the US would not default on its legal obligations to the holders of its debt, it would instead default on pledges made to its own citizens

AFP, Washington

“In fact, some market participants have already indicated that they would be disinclined to do so,” Geithner said.

Even if rollovers go smoothly during the first two weeks of the month and the government cuts spending elsewhere, a test will come on Aug. 15 when the government has to find the funds to make US$25 billion in coupon payments on longer-term debt.

If it cannot do that, it will default — and suddenly, as Greece, Portugal and other debt-laden countries have found, borrowing becomes too pricey to afford.

Ian Shepherdson of High Frequency Economics said that the government would shut down -operations before it ever defaults on debt.

“Let us be clear ... the US is not going to default on its legal obligations to the holders of its debts,” Shepherdson said.

Instead, he said: “the US is going to have to default on the pledges made to its own citizens.”

However, within a few days of a shutdown, irate Americans would besiege their representatives, he said, and the sheer force of voter power would scare even the most dogmatic of lawmakers to help push through a hike in the debt ceiling.

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