Egyptian researcher in international relations and political economy Abu Bakr El-Deeb spoke about the decision of the United States of America to raise interest rates for the tenth time and the impact of this decision on Egypt and developing countries.
Al-Deeb added in an exclusive statement to RT that the Federal Reserve decided to raise interest rates by 0.25% to a range of 5.00%-5.25%, the highest level in 16 years, indicating that it is on the given path. despite the wave of bankruptcies hitting US banks, which leads to turmoil in the banking sector and collapses in financial markets due to fears of default on public debt.
Abu Bakr El-Deeb explained that despite repeated rate hikes, inflation remains well above the central bank’s target of 2%, raising concerns that the Fed may need to tighten credit even further to slow price increases.
“This will be followed by further increases in interest rates, a trend that will lead to even higher borrowing rates and increase the risk of a recession,” he added.
Abu Bakr El-Deeb added that the US national debt amounted to $ 34.4 trillion and for the first time in history reached a record level, which could threaten the world’s largest economy with the risk of bankruptcy or default on public debt.
Regarding the impact of the US decision on emerging markets in general and Egypt in particular, El-Deeb emphasized that this decision will have a negative impact on currencies. The US Federal Bank’s monetary tightening policy and its frequent rate hikes from 2022. will certainly negatively affect the currencies of emerging markets and increase the cost of obtaining US currency and the weakness of foreign trade payments to these markets, and, consequently, the growth of inflation and prices, as well as an increase in the value of dollar debts, as a result of which it appears to be an export of US inflation to the world.
In addition, an increase in interest rates on the dollar increases its strength against other world currencies, which weakens the purchasing power of the latter in the light of the dependence of the world economy on the dollar as a currency of commercial settlements and gold and foreign exchange reserves. International trade is conducted in dollars, which could trigger a financial crisis that will push the global economy into recession. Emerging markets such as Egypt are suffering from the strength of the dollar and rising US debt. However, this is far from a US bank failure crisis, because it deals directly with the US Federal Reserve, as many Arab countries do.
Abu Bakr Al-Deeb said that this expanding crisis would explode in the face of the current US administration, and this prompted US Treasury Secretary Janet Yellen to call on Congress to raise the federal debt ceiling, saying that defaulting on US debt would lead to a historic financial crisis, and Treasury Secretary Janet warned that he was being softened by the fact that the US would run out of cash if Congress failed to reach an agreement to suspend the debt ceiling in the United States. Reaching the US debt ceiling means the government cannot borrow more money, making it unable to spend.
He referred to US President Joe Biden’s request to meet with parliamentary leaders to discuss the issue on May 9, but the question is whether Republicans and Democrats will agree to end the financial crisis, or will the snowball increase in size and topple the administration of President Biden and his party for upcoming presidential elections.
He stated that McCarthy’s statement revealed the inability of the administration of the current US president to work in light of the progress of a number of US representatives with a bill to reduce financial confusion, and the president and the Senate demanded the need to work on resolving this crisis before it escalates, which portends a negative stance of the US president. in the upcoming presidential elections.
He said it comes at a time when the US Treasury Department plans to increase borrowing through the end of the second quarter of this year by a total of $726 billion, about $449 billion more than expected earlier this year. to a lack of tax revenue and increased spending by the government, in addition to liquidity shortages, norms.
He pointed out that if a solution to the crisis is not reached, the United States will enter into default, which will negatively affect global financial markets. The US Treasury Secretary warned that the United States is at risk of defaulting on its debts. starting early next June. Ahmed Sonbol: The crisis has not stopped within US borders as the World Bank has repeatedly warned that the United States has entered a “very dangerous” stage due to the US administration’s failure to reach an agreement with the Republicans to end the debt ceiling crisis.
The US administration, which runs the largest economy in the world, is trying to face the risk of default on the national debt with unusual measures aimed at reducing the amount of debt, but is met with obstacles from its historical rivals, the Republicans, and it appears in the blood of having contacts. formal or informal, between the White House and the speaker of the House of Representatives over raising the national debt ceiling, and the ongoing discussions between Biden and McCarthy are happening only in front of the media.
Abu Bakr Al-Deeb confirmed that last Wednesday the speaker of the House of Representatives of Congress introduced a bill to raise the national debt ceiling by $1.5 trillion in an economy of more than $4.5 trillion. this, and the bill is now heading to the Democratic-controlled Senate, and the bill also included cutting public spending, eliminating some renewable energy-related tax credits, and tightening requirements for some anti-poverty programs, which angers Biden, who Congress continues to call for unconditional borrowing limits and warns that if this is not done, then the country will not be able to repay the debt next summer and thus will not achieve the vision of raising the debt ceiling, which affects the US economy at home and the credit rating at a time when America is facing with a huge economic crisis represented by rising inflation to record levels the country has not seen in 4 decades, in addition to the collapse of a number of US banks, rising consumer prices and the reluctance of many countries to trade dollars or keep them in their cash reserves in the Central bank.
Al-Deeb continued: “The problem is that raising the national debt ceiling will encourage the US Federal Reserve or the US Central Bank to resume printing fiat money, and the largest US creditors will reduce their investment in US Treasury bonds and US bills, which will fuel inflation. … The higher the interest, the lower the value of the bonds.”
Washington’s failure to pay its debts represents a loss of investor confidence in the dollar, resulting in a weakening economy, job losses, and the federal government’s inability to continue to provide its full service.
He said the failure of First Republic bank revived fears of a collapse or damage to the banking sector, following the announcement of the top 5 bankruptcies in the US banking sector. as Washington Mutual was No. 1 in 2008 with $307 billion in assets, add Silicon Valley Bank, with assets estimated at around $167 billion, and Signature Bank, with assets estimated at around $110 billion, and thus the banking sector of America has lost a new player.
He added that after the severe economic crisis, the wave of US bank failures reminded the world of the scenarios of the collapse of the global economy in 2008, and in the US and in world markets in general, although the Arab countries placed their sovereign dollar funds mainly in the US Federal Reserve Bank, rather than in American banks, Arab deposits are securely invested in a short-term investment portfolio by the Central Bank of America and in accordance with standard investment guidelines that avoid various risks, but despite this, the full consequences are still not clear, especially in light of the non-disclosure of information about all customers or banks associated with banks that have declared bankruptcy, which may be undertaken by some banks or companies to reduce panic and loss of confidence.
He pointed to the fears of international markets about a possible downgrade of America’s credit rating, which means that the global bond market will lose about $100 billion. The size of the US bond market is $10 trillion, half of which is bonds owned by foreigners, and $4.5 trillion. are treasury bonds held by non-US governments and institutions. Perhaps and this is the cause of the global concern about the possibility of America’s credit rating being downgraded, since America’s inability to pay its debts will not benefit from rescue attempts, as happened with Greece, Ireland and Portugal, and then the solution for America would be to write off a lot of its debt and drastically lower the value of the dollar.
Source: RT