The Debt Ceiling: Not Just an American Problem

US Treasury Secretary Jacob Lew (extreme left) joins other dignataries in the Fifth Meeting of Finance Ministers of the Americas and the Caribbean. Photo credit: Gary Cameron (Reuters). Source: El País (

The United States is not alone fretting over not raising the debt ceiling. Latin America is also concerned.

This week, the Inter-American Development Bank (IADB) hosted the Fifth Meeting of Finance Ministers of the Americas and the Caribbean, with Treasury Secretary Jacob Lew representing the United States. After making the rounds earlier in the week on the Sunday morning news shows blowing the whistle on the dire consequences of not raising the debt ceiling before the October 17 deadline, Lew was told of other consequences by his fellow finance ministers in the rest of the continent, including the Latin American ministers. Colombian Finance Minister Mauricio Cárdenas, the meeting chariman, stated that a not raising the ceiling will lead to a default that could be very bad for Latin America, which depends so much on the US economy. As a matter of fact, according to the IADB’s DATAINTAL database, the total value of all trade with the US in 2012 – exports and imports combined – was of about $695 billion, while that with second-fiddle China was of about $224 billion (Cuba and Haiti were not included in these estimates). Similarly, Shannon K. O’Neil, blogging for the Council on Foreign Relations, revealed that Mexico, Chile, Colombia and (surprise, surprise) Bolivarian Venezuela were importing more goods from the US than anywhere else; and that American foreign direct investment (FDI) comprised over $25 billion, just under 20% of the grand total in 2011.

In my last blog post, I pointed out that although Latin American economies have grown by leaps and bounds over the last decade, there is always that little knuckleball along the way. In this case, that knuckeball is global economic volatility, because every economy in the world – including Latin America’s – is closely connected to each other and a glitch in some spot will somehow be felt elsewhere. A US default resulting from not raising the debt ceiling is part of that volatility Latin America has to face, on top of the predictions from the Economic Commission for Latin America and the Caribbean for slow economic growth by the end of this year. As far as the default goes, the US may not be able to pay interest to investors in US Treasury securities, which are virtually the foundation of the global economy, because it would not have enough money to do that and pay its domestic bills (veterans benefits, Social Security, Medicare, Medicaid, etc.). According to the most dire predictions of the Treasury Department, missing those payments could plummet the value of the US dollar, freeze credit markets, and lead to an increase in interest rates, as well as triggering a recession as bad as the last one or worse. For any country that has US dollars in its currency account (which is to say, every country in the world) and/or depends on either FDI or lending from the US, default equals doom. Latin America is no exception; hence its concern with what happens with the debt ceiling.

That concern is not unfounded because a recent study from the World Bank revealed something that was unthinkable decades ago: Latin America’s middle class is growing. More precisely, the study concluded that the number of people on the regional middle-class income bracket – from $10 to $50 a day – grew 50% over the last decade and is now at 50 million people or 30% of the total population, also shrinking the share of poverty to 30% of the total population. It also said that since this increase was due in part to the economic growth of the last 10 years, any mayor snag in the global economy will stop this growth; ergo, this expansion of the middle class will be affected and many who just entered that bracket will likely be pushed out of it. One such snag in the global economy will be caused by a US default, as if the current headaches of the Latin American middle class were not enough. Two stand out: an unmet demand for quality public services, and extant inequality.

As I write this blog post, it seems that the politicians in Washington are talking to each other rather than at each other, although there is no deal yet. Whether Latin America has to bite the bullet after all or will dodge it remains to be seen.

This entry was posted in Foreign Relations, Governance. Bookmark the permalink.

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )


Connecting to %s