What Happens to the Global Economy if the U.S. Defaults? 'Not Much,' Say Some Economists

Predictions about the potential effects on the global economy of a U.S. default have verged on the apocalyptic. This weekend, World Bank President Jim Yong Kim characterized the possibility as "disastrous" for both the developing world and developed economies, while International Monetary Fund Managing Director Christine Lagarde argued that a default "would mean massive disruption the world over." Financial leaders speculate that a failure to raise the debt ceiling could trigger higher interest rates, stalled growth, or even a global recession reminiscent of (or worse than) the one caused by the collapse of Lehman Brothers in 2008.

But not all economists are ready to jump on that bandwagon (which is not to say that they necessarily sympathize with the GOP's vocal camp of "default deniers"). Some maintain that a partial, or technical, default (meaning the government would pay some of its debts late) would be short-lived, if still potentially catastrophic. And others argue that the consequences of such a default would be much tamer than headlines suggest.

Analysts at the London-based global research firm Capital Economics, for instance, assert that speculation about the effects of U.S. default "is surely overdone," adding that "the fall-out should be limited and far less severe than that which followed the collapse of Lehman Brothers" so long as the default does not reflect the U.S. government's "fundamental inability to pay."

"The crucial difference is that the US government would still be a going concern, with all the tax and spending powers of a sovereign state," the firm wrote last week. "Once the politicians reach a deal, there is no doubt that the US could return to servicing its debts as usual. What's more, whereas the failure of Lehmans came out of the blue, global policy-makers and market participants still have some time to prepare for a potential US default." While Treasury yields and borrowing costs would almost certainly rise, they argue, this would not necessarily hurt the global economy.

China and Japan, which respectively hold $1.28 trillion and $1.14 trillion in U.S. Treasuries, have voiced concern over how a default could impact their considerable investments. But Capital Economics' Andrew Kenningham told Foreign Policy that even they "would not be too badly affected provided the U.S. government does pay in full in the end." He added: "The renminbi value of reserves [held by the People's Bank of China] is always changing in value in response to exchange rate movements and the mark-to-market value is always changing in response to movements in bond yields. So a rise in yields and accompanying fall in prices for a portion of these reserves, for a short period, would not have an out-of-the-ordinary effect."

Roger Altman, a former deputy secretary of the Treasury Department, has similarly argued that a short-term default would do minimal damage. "We're not likely to see more than a passing impact on the economy or on financial markets," he told Bloomberg earlier this month. "There's nothing historical to suggest that however ugly and noisy and frustrating this situation is, that there will be any permanently lost output, any permanently lost growth, or incomes or asset values."

It's still an unpopular position: In a recent IGM poll that asked whether a U.S. default would cause "severe economic harm," only one out of 36 economists -- Pinelopi Golberg of Yale -- replied that such an outcome was unlikely (provided that a default were reversed within a week). 

And that's the key takeaway: The shorter the default, the more limited the damage. The real threat to the global economy would be a prolonged default that plunges the United States into another recession. This is the outcome that most concerns global leaders -- but one that seems unlikely (though not impossible) to analysts at Capital Economics.

At the World Bank and IMF meetings this weekend, Asian bankers and traders were reportedly nonplussed by the threat of default, with one banker remarking, ""The prevailing view in the market is that someone in Washington will blink and this will all blow over." And if they don't blink? The key question will be just how long Washington's warring factions stare each other down.



40 Percent of Afghans Don't Know Who They'll Vote for in the Next Presidential Election

With six months until presidential elections and half the country undecided, it's officially campaign season in Afghanistan. Twenty-seven candidates have registered to be put on the ballot -- though many of these will likely be disqualified as their paperwork is reviewed. The first tracking poll, conducted by the Afghan news network TOLOnews and consulting company ATR, is already out -- and it shows that Afghans have a long way to go to make up their minds about who should succeed President Hamid Karzai.

The leading contender in the race is Abdullah Abdullah, the country's former foreign minister who ran against Karzai in 2009 but ultimately withdrew from the contest rather than force what would have been a divisive runoff election. He has the support of about 22 percent of the country, far more than any other candidate. "Abdullah's lead at this early juncture is not surprising, since he has more name recognition than others and has also spent the last few years organizing for the 2014 elections," Omar Samad, a senior Central Asia fellow at the New America Foundation and former Afghan ambassador to France and Canada, told FP, "whereas many other nominees entered the race at the last minute."

Statisticians (including Nate Silver, writing just earlier this week) are quick to warn about the predictive ability of early campaign polls, and this one's no different. Javid Ahmad, a program coordinator at the German Marshall Fund, points out that Abdullah's support is dwarfed by Afghanistan's large bloc of undecided voters. They make up half the country: 38 percent of poll respondents said they hadn't settled on a candidate and another 12 percent said they don't believe there are any good candidates in the field.

Abdullah will be competing with another 2009 candidate, former Afghan Finance Minister Ashraf Ghani (sometimes referred to with his tribal affiliation, Ahmadzai), who was favored by approximately 14 percent of respondents. Like Abdullah, Ghani's support is concentrated in urban areas. Rounding out the top three is President Karzai's brother, Qayum, who polled under 10 points, but enjoyed more rural support than the leading candidates, especially in Afghanistan's southern and eastern provinces. Of the other 24 candidates, only five were selected by at least 0.5 percent of the poll's respondents.

The challenge, Samad and Ahmad noted, will be for the candidates to transcend ethnic and regional lines and build nationwide support. As in U.S. elections, some of that can come through the careful selection of running mates -- a consideration that already shows somewhat in the polling data, as Ghani's vice presidential candidate, Gen. Rashid Dostum, is earning him supporters in northern Afghanistan. But that won't be enough in April, says Samad, who explains, "Potential front-runners cannot rely solely on a single regional/ethnic constituency, and [will] have to cross the boundaries to remain viable."

That will take a combination of broad appeal, political finesse, and old-fashioned patronage -- the effects of which aren't apparent yet in the polling data. This sort of network-building is something Hamid Karzai has mastered over the past decade, and which Qayum was deeply involved in during his 2009 campaign. "With Karzai still in power and as a key powerbroker, he can easily employ his vast patronage network in support of whomever he will back," notes Ahmad. Karzai's support network will play a large role, but it's not the only route to an electoral victory. The Karzai network "kept the polity fractured and disorganized," says Samad, but Abdullah's approach has been to build a coalition that's "a mix of factional, regional, urban/rural, and small-scale alliances, which do not rely very much on traditional clan-style politics." That served him well in 2009.

There's also the issue of corruption. Reuters reports that votes are already being bartered and sold; the going rate is about $5.

The real prize -- and what to watch over the next six months -- is Afghanistan's undecided voters, and which candidate can build support not just in the north or the east, but across such a factionalized country.

You can read the full tracking poll below: