America faces 'financial armageddon', says Kenneth Rogoff
Former IMF chief economist compares President Barack Obama’s position to the 1962 Cuban missile crisis
Politicians were hopeful that they would strike a temporary deal to raise America’s $16.7 trillion debt ceiling and end the government shutdown, but the discussions floundered on Tuesday, just one day before the country breaches its borrowing limit. Photo: REUTERS
By Katherine Rushton, US Business Editor
7:17PM BST 15 Oct 2013
America faces “constitutional breakdown” or “financial armageddon,” one of the country’s leading economists has warned, as talks to end the political stand-off in Washington fell apart.
Professor Kenneth Rogoff, a former chief economist of the International Monetary Fund, compared President Barack Obama’s position to the 1962 Cuban missile crisis, when the Kennedy administration refused to negotiate with Cuba and the Soviet Union despite the threat of potential nuclear destruction.
“It's very hard to see a silver lining to this. It's a constitutional breakdown [but] threatening financial armageddon is blackmail," Mr Rogoff, who is now a professor of economics and public policy at Harvard, told the Telegraph.
“President Obama should push them [the Republicans] to the brink. This has implications beyond the moment. There is a danger of weakening the presidency on a long-term basis.”
Politicians were hopeful that they would strike a temporary deal to raise America’s $16.7 trillion debt ceiling and end the government shutdown, but the discussions floundered on Tuesday, just one day before the country breaches its borrowing limit.
Professor Rogoff said it was increasingly likely that the US government would have to resort to making social security payments with “scrip”, or IOUs, following the breakdown in talks. However, it remains very unlikely that there will be a much more serious “CDO event”, where America defaults on paying interest on its bonds, he added.
Investors appeared to agree with him. Markets fell on Tuesday as the Washington talks floundered, but not anywhere near the degree one might expect as America inched closer to financial meltdown. The Dow Jones Industrial Average finished down 0.9pc, at 15,168.01, while the S&P 500 closed down 0.7pc, at 1,698.06.
Professor Rogoff echoed the view of Christine Lagarde, IMF chief, that the bond default would be “catastrophic” to the global economy.
‘A good guess is that it would be worse than you think,” he said. “There are so many contracts in the global economy that take as givern that [US] treasury receipts are cash, that you would expect [severe consequences]. Christine Lagarde’s guess is a good one. We are talking, at the bare minimum, about global interest rates would go up across the board, and that markets would break down.”
He added that America would quickly swing into action to stem the fall out, but that investors faith would be shaken on a permanent basis. “Their virginity will be lost," he said.
