Navigating the United States out of its "fiscal swamp" is a dangerous affair that threatens investors worldwide, says Citi Chief Economist Willem Buiter.
Even if the U.S. avoids defaulting on its debts, just coming so close to a default deadline throws the global economy into murky waters.
"The implications of even a technical U.S. default are likely to be severe both for the U.S. and the world economy, involving a widespread rise in public and private funding costs, a generalized fall in asset prices, and a large hit to economic growth," Buiter says in a research note.
If the country manages to live up to all of its financial obligations, a downgrade to AA ratings from AAA will sting.
"The consequences of a U.S. downgrade to AA are likely to be much less severe than those of a U.S. default, but still significant and involve direct and indirect responses," Buiter adds.
The impasse revolves in part around how much the government should cut spending over the long term after it raises the ceiling.
An analyst at Standard and Poor's, one of the ratings agencies that is threatening to strip the U.S. of its AAA credit rating, says $4 trillion is a good number.
"Four trillion dollars would be a good down payment," says John Chambers, chairman of the company’s sovereign rating committee.
"A grand bargain of that nature would signal the seriousness of policy makers to address the fiscal situation in the U.S."
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