Global finance risk - US budget brinkmanship affects us all

You might be forgiven for thinking that Finance Minister Michael Noonan is the most important man in your life this week.

You’d be wrong.

You might imagine it is his and the Government’s decisions in tomorrow’s budget that will be the defining factor in your family’s future and well-being.

Think again.

The most important decisions concerning all our futures will be taken 3,000 miles from our shores. What US President Obama and his Republican party rivals do this week will matter far more than what our Government does.

Consider, firstly, the remarks of Christine Lagarde, the sober and sombre head of the IMF. Ms Lagarde is rarely given to superlatives but she has warned that a US debt default would send the world back into recession.

That would be as catastrophic for Ireland as the day in Sept 2008 when Wall Street bank Lehman Brothers filed for bankruptcy, sparking a global financial tsunami.

In an interview on American television, Ms Lagarde said that if the US defaulted on its debts, not only would the standing of the US economy be at risk, it would result in massive disruption all over the world.

Ms Lagarde’s intervention came on the same day the World Bank warned of a disaster for the developing world if politicians in the US cannot reach an agreement to increase the government’s borrowing limit by Thursday’s deadline.

World Bank president Jim Yong Kim says there is a danger of rising interest rates and slower growth that would affect the global economy. Politicians of all hues and persuasions agree. In a rare display of consensus, leaders from China, Japan, Saudi Arabia, Germany, and Singapore have all pleaded for a speedy resolution — saying that a default by the US would have a profound effect on their economies.

The crisis has seen a partial US government shutdown, with thousands of federal workers put on unpaid leave. Republicans have refused to approve a budget unless Obama’s healthcare law is delayed.

Beyond the immediate financial consequences, the episode has led some to question America’s world dominance, particularly in economic and financial affairs. The shutdown has particularly spooked China, which is advocating for Europeans and Asians to create a ‘de-Americanised’ world.

It is hard to disagree with their logic, even if they are primarily motivated by self-interest, as China is the biggest foreign holder of US debt.

“As US politicians of both political parties fail to find a viable deal to bring normality to the body politic they brag about, it is perhaps a good time for the befuddled world to start considering building a de-Americanised world,” declared China’s state news agency Xinhua, which is regarded as the voice of government.

In a lengthy polemic, it added: “Such alarming days, when the destinies of others are in the hands of a hypocritical nation, have to be terminated. A new world order should be put in place, according to which all nations, big or small, poor or rich, can have their key interests respected and protected on an equal footing.”

That sounds very lofty, but it makes sense and may become essential if the rest of the world does not wish to remain hostage to America’s misfortunes.

Mr Noonan, please note.