Default Threat Generates Fear Around Globe

By STEVEN ERLANGER Published: October 7, 2013

LONDON — The bitter fiscal stalemate in Washington is producing nervous ripples from London to Bali, with increasing anxiety that the United States might actually default on a portion of its government debt, set off global financial troubles and undercut fragile economic recoveries in many countries.

Five years after the financial crisis in the United States helped spread a deep global recession, policy makers around the world again fear collateral damage, this time with their nations becoming victims not of Wall Street’s excesses but of a political system in Washington that to many foreign eyes no longer seems to be able to function efficiently.

There is plenty of evidence that the United States remains engaged globally on many levels, with the dual commando raids on targets in Africa this weekend the most recent. But the partial shutdown of the United States government has shown again that Washington’s problems extend beyond American borders. Effectively grounded by the political crisis at home, President Obama was absent from a summit meeting of Pacific Rim leaders in Indonesia on Monday, giving China greater opportunity to highlight its role in the region.


One of the attendees, President Vladimir V. Putin of Russia, provided a possibly sardonic statement of sympathy for Mr. Obama. “We see what is happening in U.S. domestic politics and this is not an easy situation,” Mr. Putin said, adding, “If I was in his situation, I would not come, either.”

In Europe, the effort to reach a big new trade accord with the United States is at a standstill, with many government agencies in Washington operating with skeletal staffs. And as worrisome as that kind of delay is in Europe, it is only a precursor to the almost certain economic fallout if the United States does not raise the debt limit and defaults for the first time on government securities.

Foreigners often complain, usually with some forbearance, that the United States is so powerful that its president is in some important sense their president, too. In their case, however, they lack the opportunity to cast a vote.

There is not much that any foreigner can do about Mr. Obama’s confrontation with the House speaker, John A. Boehner, who said Sunday that his Republican members would not accept a clean bill — one with no conditions — that would raise the American debt limit before the government hits its borrowing limit and risks technical default as soon as next week. At the same time, Mr. Boehner has told colleagues privately that he would avert a default, but whether he actually has the ability to do so remains uncertain.

“The international community is asking, ‘Does the U.S. still have the will to act?’ ” said Xenia Dormandy, a senior fellow at London’s Chatham House and a former American official in the State Department and the National Security Council under President George W. Bush.

“Both the Syria vote and the current budget crisis are nerve-racking for the world,” she said, referring to Mr. Obama’s sudden decision to ask Congress to authorize a strike on Syria and then changing his mind.

Alain Frachon, a columnist and former Washington correspondent for the French newspaper Le Monde, said, “Washington is looking more like the Italian political system, with its permanent crises, and not a presidential system, as before.”

“People are worried about the debt ceiling — it could be the little drop that could trigger another crisis in financial markets,” he said. “And it’s just when there was the perception for the first time in the long sovereign debt crisis that there is a window of opportunity to breathe a little bit, and to introduce a bit more suppleness into the way we’ve managed it.”

The anxiety is all over Europe, Mr. Frachon said, and it comes just as Greece and Spain seem to be turning around, as there are spurts of growth that promise an end to recession, and as Germany has gotten through its elections and Rome through another political crisis. Another financial meltdown would hurt France, too, he said, not just Greece, Portugal and Spain.

“People don’t want to see all this fragile equilibrium destabilized by a possible financial crisis provoked in Washington,” he said.

Jean-Paul Fitoussi, an economist at the Institut d’Études Politiques de Paris, said a default would slow the American economy and depreciate the dollar, “so it would lead to a loss of competitiveness in Europe at the very moment when all policies in Europe are aimed at increasing competitiveness, and that would be very bad news.”

Perhaps worse, he said, is that “the banking system in Europe remains fragile, so more bad news could have unforeseen consequences on the world’s financial system.”

The United States has gone through government shutdowns before, Mr. Fitoussi noted, but this time it feels different, even if it turns out to be short-lived.

“Perhaps we have not completely understood the American Constitution, and the effective power of the president is not as strong as we believed,” he said. “And maybe it’s because Obama is not using his constitutional power very well.”

The weekend military strikes on terrorist targets in Libya and Somalia are a perfect indication that the American government can act when its direct interests are at stake, said Ms. Dormandy of Chatham House. But the deeper question is whether a more insular, less globally active United States is emerging for the longer term, or is just a function of the Obama administration’s reaction to events.

“The jury is still out,” Ms. Dormandy said, “but I would say it seems like a more profound transition.”

Alexander Lambsdorff, a member of the European Parliament for the German Free Democratic Party, sees a possible benefit for the euro and the euro zone if the United States defaults, however briefly. Investors will seek an alternative to the dollar in German, Dutch and Finnish bonds, he said. “If European leaders have proven one thing,” he said, “it is their resolve to keep the euro afloat and their countries out of default.”

Mr. Lambsdorff said that he admires the United States Constitution, but that the founders never imagined “a media democracy.” The weakness of the American system is in the constant political campaigning required for the House of Representatives, he said.

“In the permanent campaign mode the representatives find themselves, there is an incentive to be more radical and less compromising,” he said. “But no democracy works without compromise, and if compromise starts to be elusive, then a democratic system has to rethink itself.”