America has finally extended its borrowing limit, but why did it happen and how has it affected the other global economies? This article looks to explain the situation and why an American default was never going to happen.
The world was holding its breath to see whether America’s government could agree a deal to extend the amount it is allowed to borrow.
Many people had speculated that the effects of seeing America defaulting would cause similar situations to the global recession that many of us are still recovering from.
The American government went into shutdown mode over 2 weeks ago and since then the world’s markets have remained sceptical over how best to react to this news.
The USA had until today (17th October 2013) to agree a new deal or it will default on the money it owes. Put in black and white terms, a default would have been very, very bad. However, a new deal allows everyone from investors to foreign politicians and American citizens breathing a sigh of relief.
Stock markets usually serve as an indicator to what the world thinks is likely to happen, and in the face of an event with global repercussions many markets, mainly non-American, stayed fairly strong.But why?
The condition of America’s economy generally gives a good indication of the state of the world’s economy.
Looking back to the banking collapse of 2008, the effects of the American economy taking a nose-dive influenced many other economies to do the same, with investors taking their money out of the stock market for fear of seeing their investments lose value.
Even when the debt ceiling situation within the US was becoming clear to the rest of the world, news from countries around the world was mostly positive.
Spain, who have had a tougher time than the UK, has seen the amount it has been charged to borrow dropped and similar stories have been reported from many other recovering economies.
Unemployment figures for the UK are getting lower, and forecasts for growth and a bigger and more productive economy are being predicted.
These statistics come down to the reality of the US situation.
The prospect of seeing the US failing to raise the amount they were allowed to borrow was – like the possibility of many large banks failing at the start of the credit crunch – completely unforeseeable.
Both of these situations would require huge amounts of reorganisation which would significantly affect the global economy for a much longer time than they currently have.
The whole situation has been undeniably hard to follow, but seeing countries struggling for cash is hardly a new thing.
National, or Government debt as it is sometimes called, is the amount owed by a country to its creditors – countries usually borrow from the IMF (International Monetary Fund) or World Bank – and is the amount that the country needs to keep functioning.
This includes paying all those working in the public sector,meaning organisations such asNASA were temporarily closed during the shutdown, with only a few essential services still fully operational including the active military.
Resolving The Crisis
A deal was done within the American senate, the equivalent to the British Parliament, by midday.
This sent reassurances to the world’s economies that there was no need to put together emergency plans to deal with the consequences.
With the benefit of hindsight, the problem the US faced was not that complicated to fix, the only reason it had got to this stage was down to old fashioned human stubbornness. Two sets of people with differing views not wanting to give in, until it reached a point where they had to buy more time to properly solve the problem.
As soon as this deal was confirmed, America’s stock markets have seen a large rise, after dropping to lower levels as the deadline approached.
So basically, everything is back on track.
This is an article by Jamie Smith on behalf of Loans4Tenants. Loans4Tenants provide guarantor loans with a tenant guarantor; to learn more about how they could help you visit https://www.loans4tenants.com