US Debt Default Could Affect GCC

With the US federal government in virtual lockdown for almost a week, global markets remain watchful.

Though the shutdown has been branded an internal problem to date, the government’s failure to reach a decision on the debt ceiling on October 17 could have wider repercussions.

As the date set for the Congress to decide on a debt ceiling nears, global markets, including the GCC, may feel the contagion.

“The main threat to the GCC from the US shutdown is the prospect of higher interest rates if the debt ceiling is not raised on October 17,” said Peter Cooper, managing editor of Arabian Money.

“Higher interest rates would be bad news for the global economy and that would be reflected in lower oil prices and reduced regional trade and tourism.”

The US reached its allowed debt limit of almost $16.7 trillion, a cap on the amount the government can borrow, in May and has since been relying on various measures to keep paying the bills.

In a worst case scenario, failure to reach an agreement about raising the debt ceiling could result in an American governmental default.

If a default happens, international markets will be spooked due to large scale global investments in US treasury bonds, traditionally considered a safe investment.

“Financial markets would all take a tumble. Bonds would come down with higher interest rates and equities would suffer with the reduced business outlook. Real estate prices would be at best stagnant if interest rates move up sharply,” said Cooper.

But the markets are expecting a quick resolution of this issue with the hopes that the government will succeed in raising the legal borrowing limit by the given deadline, said M.R Raghu, senior vice president-research at Kuwait Finance Centre.

“If that does not happen, then we may see sharp depreciation of the US currency and a spike in market volatility,” he said.

“Since GCC markets are increasingly being influenced by global events, we may see negative sentiments in the region.”

Despite a risk of debt default, Saudi Arabia, the GCC’s richest economy, has said that it is not worried about the political impasse at Washington DC.

Saudi’s central bank governor Fahad al-Mubarak told reporters on Sunday that the Kingdom is not concerned about a potential debt default since the US government has previously managed to resolve its lockdown issues.

Saudi Arabia, which is a major holder of US government bonds, could be heavily impacted in case of a debt default.