WASHINGTON DC - Democrats and Republicans in Washington DC have been locked in bitter debate for months over a legal provision to grant the government authority to continue borrowing money. And as a result, the US Treasury expects the country to default on its financial obligations abroad if US lawmakers do not vote to raise the country's debt ceiling by 2 August. The stalemate has significant domestic implications, but the outcome of the debate, economists argue, will also have a lasting impact on global economic developments. With the credibility of American loan payoffs edging toward uncertainty, stock markets across the globe are suffering. “There are a lot of crises in the world we can't always predict or avoid - hurricanes, earthquakes, tornadoes, terrorist attacks. This is not one of those crises,” US President Barack Obama said Friday. Members of the Republican-dominated US House of Representatives, the lower chamber of Congress, voted in favor of a bill aimed at raising the debt ceiling late Friday night but the legislation was quickly shot down by the Democrat-led Senate. And in a rare weekend session of Congress, the Senate on Saturday delayed a vote to advance the Democrats' debt plan, opening a tentative window for compromise on Sunday. “I believe we should give everyone as much room as possible to do their work,” said Senate Majority leader Harry Reid, speaking Saturday after the Senate vote delay. The dispute focuses on a resurgent debate over the proper size of the US federal government, with Republicans urging less federal spending and Democrats supportive of larger government expenditures. Economists have expressed concerns that reduced US spending will dampen global growth. International investors, meanwhile, are criticizing Congress' “reckless risk” to investor confidence in US debt. Several European countries, watching their credit worth sink, face severe investor confidence concerns. The US debt showdown “is a self-inflicted problem, which I don't see why they have created,” said Dr. Mahdi Mattar, an economist with CAPM Investment PJSC in the United Arab Emirates. The crisis is unnerving investors from Asia to the Middle East, according to Mattar. If the US fails to pay its bills, investors will lose confidence in US loan obligations, creating “a shock to our global markets, whether emerging, developed or frontier markets as is the case in the Middle East,” Mattar said. US lawmakers have voted repeatedly in the past to raise the debt ceiling and, most observers did not expect the stalemate to escalate to its current state. In the past several weeks, however, negotiation failures between Republicans and Democrats are leading some to believe the US Congress will fail to ward of an impending financial crisis. The Republicans gained control of the House of Representatives in the 2010 elections. Many newly elected Republicans align themselves with the “tea party” movement, which adopts a fiscally conservative platform that includes fierce opposition to any tax increases. Mainstream Republicans and some “tea party” members, however, hope to bargain the debt ceiling issue with mandatory federal spending cuts. Led by House Speaker John Boehner, House Republicans are also pushing for a constitutional amendment that would require the US to have a balanced budget with no deficit spending. Last week, Democrats and Republicans set out to write separate laws aimed at raising the country's borrowing limit. But without compromise, neither law can pass both chambers of Congress. Officials with the US Treasury and the Federal Reserve met on Friday with bankers in New York to prepare the financial system for a potential default. But global financial conditions do not appear threatened in the way they were three years ago during the climax of the US housing contraction and the subsequent economic collapse. In fact, investors continue to buy US Treasury bonds today for security and safety. The US bond market has “been remarkably stable,” said Giyas Gokkent, an economist at the National Bank of Abu Dhabi. While “there is general global weakness” in stock markets, “there is no evidence that investors have pulled money out” of US bonds, he said. Renewed emphasis among American lawmakers for federal spending restraint in general, however, seems poised to significantly impact the global economy. Gokkent said the world economy relies on US consumer spending on imports from Asia and oil-producing countries. This spending is “recycled” when the exporting countries buy US bonds for their dependability, according to Gokkent. “Our main concern would be if the outcome of the [US] debt negotiations led to a renewed slowdown in US and global growth,” said Liz Martins, senior economist with HSBC Bank in Dubai. This slowdown could lead to reduced oil consumption, she said. And spending cuts could have implications for the US military presence in Iraq and Afghanistan. Both spending plans offered by Republicans and Democrats aim to save money by reducing the number of troops in the US' two primary theaters of war. While the details for war spending are not finalized, there is consensus to strongly curtail combat expenses. Lawmakers in both parties may “yank the plug and turn tail” on the Iraq and Afghanistan wars if they decide they can afford to proceed with less of a presence on the ground, said Baker Spring, a research fellow at the Heritage Institute in Washington. The decision on troop levels in both conflict zones “is not immune” from the spending debate, he said. US military commanders last week complained that defense spending cutbacks have weakened combat readiness. The call to withdraw troops may be loudest in Iraq. Obama is “very sour on Iraq” spending, while he seems more committed to the war in Afghanistan, Spring said.
