The recent economic crisis seems not to have depleted its effects: the United States are now dealing with a very prominent scenario: the declaration of the national default towards the investors and those who possess Treasury bonds.


Obama: the speech


Just few days ago, United States president Barack Obama declared the situation of the country as being seriously worrying, for the national debt has risen to historical levels.

The risk is that the USA will have to declare, first time ever in their history, a default. This wouldn’t be that worrisome if not for the fact that the States could be followed down, in their fall, by many of the other global countries. The first in line could easily be found in the Chinese Democratic Republic, for the latter possesses a huge amount of U.S. Treasury bonds.


President Obama has been discussing, for the past ten days, with many representatives of the national Congress, in order to establish a raise in the national debt legal limit. Nevertheless, the Republicans deeply opposed the presidential proposal of 4 trillion $ in government spending cuts, and then abandoned the negotiations.


The deadline


Aug. 2nd is the deadline after which the States, if no solution is found, will have to admit the default. Tim Geithner, the Treasury Secretary, said the next week is going to be the time-limit to the achievement of a bipartisan agreement on the financial issue, but the situation still seems to be quite intricate.


Senate Minority Leader Mitch McConnell has recently proposed to the president a new authority in order to raise the federal debt limit, without cutting government spending. Whether this compromise solution will be successful is still hard to tell. McConnell claimed the proposal is not his first choice, but he also admitted that nobody wants to give the citizen the impression that default is a real option.


The social issue


McConnell proposal came after a worrying speech by Obama, warning that both Social Security and disability checks could be delayed next month, in case the two sides fail to reach an agreement: this has certainly pushed more pressure on an already difficult recovery.


I cannot guarantee that those checks go out on August 3rd if we haven’t resolved this issue, because there may simply not be the money in the coffers to do it” – said Obama during an interview with the CBS News channel.

And the social issue seems to be the most relevant one also in terms of political popularity. No matter what, the Democrats – Obama first – need to guarantee a social and economic security to the citizens, otherwise the 2012 presidential elections would turn to be a real political disaster.

Not that the present situation is really favourable to the president.


Little progress is made


According to the meeting occurred yesterday, little progress seems to have been made, as after a two-hour session secretary Geithner opened with a sobering account of the consequences of the default: he warned that ‘this is the wrong time for the United States to be testing its luck with world markets’.


The issue now is on the cutting amount: 2.4 billion for the Republicans, almost 4 billions for the Democrats. No deal has been done yet, though discussions are still at stake.


A backup plan has, actually, been proposed in case no agreement is reached. That measure would create a new legal structure authorising the president to raise the debt limit by as much as $2.5 trillion in three installments. The first, an increase of $700 billion, would come immediately. The next two, worth $900 billion each, would come this fall and sometime next summer.


Obama will then have, on each occasion, to submit to Congress an explicit request for an increase, along with a menu of proposed spending cuts equal to the requested increase. The submission of the president’s first request would automatically raise the limit by $100 billion, in order to give the Treasury Department breathing room while Congress considers the request. 15 days will be given to the lawmakers to decide whether to approve it or not, but Obama could veto the resolution, and the debt limit would rise, provided at least 34 Democratic senators stood firm in upholding his veto.


The happy ending


Though the situation is quite critical, there is no doubt a solution will be found, even in short time. Default has never really been an option, since the political and economic implications would be enormous and not armless.

There is no real evidence that the effects of the economic turndown will soon disappear, but the States won’t and cannot fail.


An happy ending will surely be found for the possessors of Treasury bonds (when they will be paid is not our chance to say), whereas is still to be understood whether the president will discover a good way to regain support and popularity within the electorate.

Given the situation, it is not so unlikely that the next elections will see a republican candidate success.



Eleonora Peruccacci, master in international relations, is an analyst of the Isag


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