America: One of two developed nations with debt ceilings
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Steve Chiotakis: Last night in primetime Americans were treated to dueling Washington speeches. President Obama urged lawmakers to compromise on a package to raise the debt limit, and warned Americans about what could happen if Congress can’t find common ground.
President Barack Obama: If we stay on the current path, our growing debt could cost us jobs and due serious damage to the economy.
In his Republican response, House Speaker John Boehner had dire warnings of his own.
House Speaker John Boehner: In Washington, more spending and more debt is business as usual. Well, I’ve got news for Washington. Those days are over.
So how is the world looking at all of this? Many around the world don’t understand what a debt ceiling is, let alone why the U.S. has one. But is the American debt limit really all that unique?
Marketplace’s Stephen Beard joins us live.
Stephen Beard: Hello, Steve.
Chiotakis: Is the U.S. the only developed country with a debt ceiling?
Beard: According to IHS Global Insight, there is one other advanced country with a debt ceiling and that’s Denmark. But their ceiling is so high, it’s never a problem.
Chiotakis: So they never have to raise it, so how do other developed countries keep their debt under control?
Beard: Well, of course, some of them don’t. Ultimately, the markets decide, investors decide whether a country’s trying to borrow too much. They’ll say these bonds are risky and demand a higher rate of interest. That’s exactly what’s happened in Europe over the past 18 months. Greece, for example, has seen some of its interest rates driven up to 24 — 25 percent. Government in Athens couldn’t afford that, and had to be bailed out.
Chiotakis: So Stephen, how is it that the U.S. built up this debt ceiling when no one else did?
Beard: Well, it’s part of the web of checks and balances in the U.S. system. Does it need a ceiling? Well, the U.S. is unique with the biggest and richest economy, the global financial system needs U.S. dollars and U.S. government bonds to function. That means there’s also a pretty big demand for U.S. dollars and bonds. And that means that investors don’t punish the U.S. for high levels of debt. The U.S. can keep its interest rates fairly low. Because of this, some analysts argue, the debt ceiling is a good trip wire — an early warning system. Here’s Steve Barrow, currency strategist at Standard Bank.
Steve Barrow: Without that process, the U.S. might just wrack up too much debt and the markets might not punish it sufficiently until one day the market finally snaps and suddenly U.S. interest rates move dramatically higher.
Beard: When the Euro was launched a decade ago, there were some limits for member countries, but they were widely flouted. Now after all the market mayhem of the last few months, there are some here saying what the Euro needs is a debt ceiling.
Chiotakis: Alright, Marketplace’s Stephen Beard in London.
Beard: OK, Steve.
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