Anyone who remembers the collapse of Lehman Brothers little more than five years ago knows what a global financial disaster is. The next disaster, however, could be only weeks away - and could impact the global markets far more than Lehman.
Bloomberg reports that a U.S. government default, just weeks away if Congress fails to raise the debt ceiling as it now threatens to do, will be an economic calamity like none the world has ever seen.
Failure by the world’s largest borrower to pay its debt - unprecedented in modern history - will devastate stock markets from Brazil to Zurich, halt a $5tril lending mechanism for investors who rely on Treasuries, blow up borrowing costs for billions of people and companies, ravage the dollar and throw the U.S. and world economies into a recession that probably would become a depression. Among the dozens of money managers, economists, bankers, traders and former government officials interviewed for this story, few view a U.S. default as anything but a financial apocalypse.
The $12tril of outstanding government debt is 23 times the $517bn Lehman owed when it filed for bankruptcy on 15th September 2008. As politicians butt heads over raising the debt ceiling, executives from Berkshire Hathaway's Warren Buffett to Goldman Sachs Group’s Lloyd C. Blankfein have warned that going over the edge would be catastrophic.
'If it were to occur - and it’s a big if - one would expect a series of legal triggers, potentially transmitting the default to many other markets', said Mohamed El-Erian, CEO of Pacific Investment Management Co., the world’s largest fixed-income manager. 'All this would add to the headwinds facing economic growth. It would also undermine the role of the U.S. in the world economy'.
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