WASHINGTON (Reuters) - Debt default. A ratings downgrade. Political deadlock. Such terms, once associated primarily with the developing world, now abound in the mighty United States.
As the U.S. Congress flirts with the once-unthinkable prospect of not paying the country’s bills, the heated battle over a usually routine vote to lift the country’s debt ceiling is dealing another blow to America’s image.
The global financial crisis, which was rooted in poor regulation of the U.S. housing and banking sectors, already tarnished perceptions of the United States overseas.
For political economy experts who have spent their careers focused on the emerging world, Washington’s protracted debt stand-off is all too reminiscent of the divisions more typical of developing-country politics.
“We attend a lot of meetings with Latin Americans and we used to complain to them about the problems they had, and now they like to say to us: ‘That sounds just like the U.S.’,” said Peter Hakim, head of the Inter-American Dialogue, a policy group in Washington.
“What’s really shocking is the inability to reach agreement. All of a sudden the U.S. is a democracy that is unable to find a compromise. We’re polarized.”
That sort of polarization is common in the developing world. The United States was often a critic of institutional disarray in places such as Brazil, where a multitude of parties makes it difficult to enact legislation, or Mexico, where the opposite problem — long-standing one-party rule — stifled political choice.
Yet the stalemate now facing the U.S. two-party system demonstrates the challenges of the divided government Americans voted for last November.
Given that the United States is home to not only the world’s largest economy but also its most liquid and safe debt market, the repercussions of a U.S. financial meltdown are potentially much larger than a more contained emerging-markets crisis.
British Business Secretary Vince Cable told BBC television on Sunday that “right-wing nutters” in the U.S. Congress were holding up a deal to prevent a catastrophic default, posing a greater threat to the global financial system than the euro zone, which has been grappling with a debt crisis of its own.
Argentina’s President Cristina Fernandez, whose own country defaulted on about $100 billion in debt a decade ago, asked last week: “When did the American dream become a nightmare?”
When advising the United States on how to deal with the budget crisis, ratings agency Moody’s last week suggested the country eliminate the debt ceiling to prevent repeats of the kind of uncertainty now gripping financial markets.
Instead it suggested following the example of Chile, where increases in debt are constrained but not technically limited.
Fast-growing countries in Latin America, including Chile and Brazil, achieved a more sustained growth path in part due to reforms aimed at reducing their debt loads and reining in budget deficits.
The push from Republican leaders for sharp cuts in U.S. government spending, which many economists say would hurt a fragile recovery, has made the rating agencies a driving force for policy. They had come under fire for giving top-notch grades to shoddy real estate securities, contributing to the financial meltdown of 2007-08.
Ratings agencies played a central role in the emerging-market debt crises in Russia, Asia and Latin America in the late 1990s. Back then they were also criticized as too late to downgrade countries with questionable credit records.
If the United States is downgraded, interest rates could rise, risking a new recession. Some Wall Street economists say the recovery is already being hampered as the threat of a debt default deals a further blow to consumer confidence.
Another damaging consequence of the debt limit scuffle has been to shift the discussion away from doing more to bring down a 9.2 percent jobless rate to a debate over spending cuts that will most likely put a damper on economic growth.
Investors, who long brushed off the prospect of an outright default as highly unlikely, are increasingly concerned and shocked that the politicians in Washington have allowed the crisis to get this far.
“The extent of political dysfunctionality will stun many, especially at a time when America needs unity and common purpose in D.C. to also address high unemployment and other challenges,” said Mohamed El-Erian, co-chief investment officer of the mega bond fund PIMCO, who writes columns for Reuters.
Haag Sherman, managing partner at Salient Partners, an investment firm in Houston, Texas, said the angry tone of U.S. politics harked back to the early days of the Republic, when the United States really was a developing nation.
“We were an emerging market then, and you have some of the hallmarks of an emerging economy today: increasing concentration of wealth, an entrenchment of the political class,” he said.
Additional reporting by Jennifer Ablan in New York; Editing by Dale Hudson