Financial Crisis Deferred?

A few weeks back, we posted an article summarizing the very real fears of the World Bank and IMF about the upcoming Federal Reserve interest rate rise.

Since then we have been tracking updates as it happened on this page

It seems that two of these potential flash-points have been deferred till December.

1. Interest rate hike – deferred till December

Why is the world so worried about an interest rate hike?

Since the 2008 global financial crisis, many central banks have pumped money into the economy to create economic stimulus. That economic stimulus has failed unlike past occasions, but in the process it has also created a great deal of “cheap debt” – lots of high risk loans that are dependent on a low interest rate.

The IMF is concerned that once the rate goes up, that defaults will begin to occur around the world, and particularly in emerging markets.

But the problems don’t stop there. The Telegraph explains more:

2. US Government Shutdown – deferred till November

Congress may have averted a government shutdown until December 11, but lawmakers will be under the gun to raise or suspend the debt ceiling long before then.

Treasury Secretary Jack Lew said Thursday he now estimates that “on or about” November 5, Treasury is likely to exhaust special accounting measures that are keeping the country’s debt below its legal limit.

At that point, the Treasury Department would only be able to pay the country’s bills with the cash it has on hand — which Lew expects to be roughly $30 billion.

And that would not be enough to cover the bills on some days, which can amount to $60 billion.

“We anticipate that our remaining cash would be depleted quickly,” Lew wrote in a letter to House Speaker John Boehner.

Lew stressed if that happens, it would be the first time in the country’s history that the United States could not meet all of its obligations.

“There is no way to predict the catastrophic damage that default would have on our economy and global financial markets,” he added.

 

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