'We have a lot to be fearful of'
US debt crisis could impact tourism, remittancesSunday, July 31, 2011
BY JULIAN RICHARDSON Assistant Business Co-ordinator email@example.com
JAMAICA faces a fallout in some of the country's major foreign exchange earners and an economic shock similar to the 2008 credit freeze if the US Congress does not reach a deal to raise its government's debt limit by Tuesday's deadline, say financial analysts.
If there's no resolution, the US government would be unable to meet some of its debt obligations and would not be able to borrow new debt after Tuesday. A default would lower the US credit rating, which analysts say would have a spillover effect on the global economy and hike interest rates.
"It would be very unstable," Money Masters president Claudette Crooks told Sunday Finance.
"We are going in unchartered waters and it will be a whole readjustment in terms of the global economy... there must be repercussions," she noted.
The US Treasury makes 80 million payments a month.
China is the largest foreign investor in US Treasuries, with holdings of some US$1.149 trillion as of April. Japan ranks second with holdings of some US$912 billion.
"This has the potential to be 10 times as worst than 2008," said chartered accountant Dennis Chung, comparing the crisis that looms to the one in the latter part of 2008 which triggered the world into a recession.
Among the implications, Chung said US treasury bonds may no longer be considered high quality collateral and balance sheet values will decline.
"Worst if they default, the values of the treasuries are going to drop which means that the US treasuries are no longer safe and the US dollar is going to depreciate... a whole credit freeze-type scenario could occur again," explained Chung.
No matter the outcome of the debt ceiling talks, Chung said the US, and by extension Jamaica, will be negatively impacted as the US moves to reduce Government spending.
"This means that the ability to create jobs will be reduced and unemployment either remain high or go up in the US, which certainly means that there will be less disposable income there," said Chung. "That's going to have a negative impact on remittances and tourism (in Jamaica) certainly, so we have a lot to be fearful of."
The US is Jamaica’s premier trading partner.
Crooks agreed with Chung on the potential impact on the tourism and remittance sectors.
“It is a situation we have to watch closely and be prepared to implement quickly should there be any need to,” said the Money Masters boss.
Coupled with the situation in the US, Chung said the delay in the quarterly reviews of Jamaica’s stand-by loan with the International Monetary Fund (IMF) could affect Jamaica’s ability to borrow on the international capital markets.
“If this is not sorted out properly by Tuesday and we have not come to an agreement on our IMF situation, from a capital market point of view it will affect us,” he said.
The Associated Press reported on Friday that while the Treasury will not have the ability Tuesday to borrow new debt, it would still be able to refinance debt that is maturing as long as the operation did not increase the total debt supply. It reported that the Treasury has to borrow on average US$125 billion in new debt each month and refinance US$500 billion in maturing debt.
The news agency reported that more ordinary investors, as they grow nervous about the possibility of a US government default, are calling their brokers and moving their money out of stocks and mutual funds for fear of a plunge in the market this week.
The US stock market declined for a sixth straight day on Friday.
Additional reporting by the Associated Press
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