DEBT CEILING CRISIS IN THE US

USA is the biggest economy in the world, but since the global recession of 2008, USA is facing tough times. There is a fall in the credit rating of USA from AA to AA+ given by Standard and Poor’s. This means that the goodwill of USA has fallen in the world market and it will have to pay a higher rate of interest on the debt taken by it. This fall in the credit rating aroused due to a late reaction of the US government to raise the debt ceiling (a debt ceiling is the limit above which country cannot borrow). US has been able to meet debt its obligations lately without any troubles, this made it easy to borrow in the international financial markets at a lower rate of interest and it enjoyed a higher credit rating with very low possibility of default. However, the inability to raise the debt ceiling on time implies that there are now fewer chances of debt been repaid. The confidence of the lenders declines and they tend to charge a higher rate of interest for their lending as they as they feel that their money is less safe in the hands of US government now. Therefore, there was a debate whether to increase the debt ceiling or not. Ultimately, a decision to raise the debt ceiling was made by the US govt. In case the debt ceiling was not raised, USA would either had to decrease its government spending or the debt obligations would have to be made after the promised date. The latter situation is known as a ‘default’. Even though the debt ceiling is raised now, USA would cut its government expenditures and raise taxes because more money is now needed to meet the higher debt obligations. This will have an adverse impact employment generation in the country because companies will outsource the jobs to developing countries as these countries have lower wage rates. This will help the companies to reduce their expenditures. Japan and Britain had warned USA that if the debt deal is not signed before Monday, The Asian stock markets would open at a low level and this would adversely affect the various economies. Nevertheless, after signing of the deal, the stock markets in Asian and other countries opened low on Monday. Asian economies would also find a fall in their exports as a consequence of higher tax rates and cost cutting in USA, which will lead to a fall in the rate of growth, and a rise in these countries.