May 6, 2023

The 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 the decision on Egypt and developing countries.

Al-Deeb added, in exclusive statements to RT, that the Federal Reserve decided to raise interest rates by 0.25% to a range of 5.00%-5.25%, which is the highest level in 16 years, indicating that it is on its predetermined path despite the wave of bankruptcy that hits US banks, which leads to turmoil in the banking sector. and crashes in financial markets due to fears of default on government debt.

Abu Bakr El-Deeb explained that despite the frequent rate hikes, inflation continues at a level well above the central bank’s target rate of 2%, which raises concerns that the Fed may have to tighten credit further to slow price increases.

He continued, “This will be followed by additional interest rate hikes, a trend that would lead to ever higher borrowing rates and increase the risk of a recession.”

Abu Bakr El-Deeb added that the US public debt amounted to $34.4 trillion and reached record levels for the first time in history, which could threaten the world’s largest economy with the risk of bankruptcy or default on government debt.

With regard to the impact of the US decision on emerging markets in general and Egypt in particular, El-Deeb stressed that the decision will have a negative impact on currencies. The monetary tightening policy of the US Federal Bank and its frequent rate hikes since 2022 will certainly affect emerging market currencies negatively and raise the cost of obtaining The American currency and the weakness of foreign trade payments to these markets, and thus the rise in inflation and prices, and the increase in the cost of its dollar-denominated debts, in what appears to be an export of US inflation to the world.

In addition, the increase in interest rates on the dollar increases its strength against the rest of the world’s currencies, which weakens the purchasing power of the latter in light of the global economy’s dependence on the dollar as a currency for commercial payments and foreign reserves. International trade takes place in dollars, which could cause a financial crisis that pushes the global economy into recession. Emerging markets, such as Egypt, are affected by the strength of the dollar and the rise in US debt, but it is far from the crisis of bankruptcy of US banks because it deals with the US Federal Reserve directly, as do many Arab countries.

Abu Bakr Al-Deeb said that this expanding crisis will explode in the face of the current US administration, and it prompted US Treasury Secretary Janet Yellen to appeal to 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 He relents that the US will run out of cash if Congress fails to reach an agreement to suspend the debt ceiling in the United States. Reaching the US debt ceiling means that the government cannot borrow more money, which makes it unable to spend.

He referred to US President Joe Biden’s request for a meeting with parliamentary leaders to discuss the issue on May 9, but the question is whether Republicans and Democrats agree to end the financial crisis, or will the size of the snowball increase and topple the administration of President Biden and his party in the upcoming presidential elections.

He stated that the statement issued by McCarthy revealed the failure of the administration of the current US president to act in light of the progress of a number of US representatives with a bill to reduce financial stumbling. in the upcoming presidential elections.

He said that this comes at a time when the US Treasury Department plans to increase borrowing until the end of the second quarter of this year, with a total amount of $726 billion, which is about $449 billion more than what was expected earlier this year due to the lack of tax revenues and increased spending. government, in addition to a deficit in liquidity rates.

He pointed out that if a solution to the crisis is not reached, the United States will enter the stage of default, which will reflect negatively on global financial markets. The US Treasury Secretary has warned that the United States is threatened with defaulting on its debts, starting from the beginning of next June. Ahmed Sonbol: The crisis did not stop within the American borders, as the World Bank was repeatedly warned that the United States had entered a “very dangerous” stage due to the failure of the American administration to reach an agreement with the Republicans to end the public debt ceiling crisis.

The US administration, which runs the largest economy in the world, is trying to face the risk of defaulting on government debt through unusual measures to help reduce the amount of debt owed, but it finds obstruction by its historical rivals, the Republicans, and this appears in the blood of the existence of contacts, whether formal or informal, between the White House And the Speaker of the House of Representatives regarding raising the government debt ceiling, and the ongoing discussions between Biden and McCarthy are only taking place in front of the media.

Abu Bakr Al-Deeb confirmed that last Wednesday, the Speaker of the House of Representatives in Congress submitted a bill to raise the government debt ceiling by $1.5 trillion, within an economy of more than $4.5 trillion. A member of Congress, while 215 voted against it, and the bill is now being sent to the Senate controlled by the Democrats, and the bill also included reducing government spending, eliminating some tax incentives related to renewable energy, and tightening requirements for some anti-poverty programs, which angers Biden, who does not Congress is still calling for expanding the limits of borrowing without conditions, and warns that if this is not done, the country will not be able to pay the debt next summer and thus not reach a vision about raising the debt ceiling, which affects the US economy at home and the credit rating at a time when America is facing Enormous economic crises represented in the rise in inflation to record levels that the country has not witnessed in 4 decades, in addition to the collapse of a number of US banks, the rise in consumer goods prices, and the reluctance of many countries to deal in dollars or keep them in their cash reserves at the Central Bank.

Al-Deeb continued: “The problem is that raising the public debt ceiling will prompt the US Federal Reserve or the US Central Bank to resume printing unsecured money with the largest US creditors reducing their investments in US Treasury bonds and bills, which will fuel inflation. The higher the interest, the lower the value of the bonds.”

Washington’s failure to pay its debts represents the investors’ loss of confidence in the dollar, which causes the economy to weaken, the number of jobs to shrink, and the federal government’s inability to continue providing its services fully.

He said that the bankruptcy of the “First Republic” bank revived concerns about the collapse or damage to the banking sector after the announcement of the 5 largest bankruptcies in the American banking sector. collapsed in 2008, and the bank’s assets amounted to 307 billion dollars, to be added to the “Silicon Valley Bank”, whose assets were estimated at about 167 billion dollars, and “Signature Bank” with assets estimated at about 110 billion dollars, and thus the banking sector in America lost a new player. .

He added that in the wake of a severe economic crisis, the wave of US bank collapses brought back to the world’s minds the scenarios of the collapse of the global economy in 2008, and a great wave of panic prevailed in the US and global markets in general, although the Arab countries deposited their sovereign dollar funds mostly with the US Federal Reserve Bank, not American banks, Arab deposits are invested securely within a short-term investment portfolio by the Central Bank of America, and according to standard investment guides that avoid various risks, but despite this, the full repercussions are not clear until this moment, especially in light of the failure to disclose all clients or banks that are linked to Banks that declared bankruptcy, a measure that some banks or companies may take to reduce panic and loss of confidence.

He pointed out the international markets’ fear of a possible downgrade of America’s credit rating, which means the global bond market will lose about $100 billion. The US bond market amounts to $10 trillion, half of which are bonds owned by foreigners, and $4.5 trillion are treasury bonds owned by non-US governments and institutions. It is possible and this is the reason Global anxiety over the possibility of downgrading America’s credit rating, as America’s failure to pay its debts will not help with rescue attempts, as happened with Greece, Ireland and Portugal, and then the solution will be for America to write off a large amount of its debts and sharply reduce the value of the dollar.

Source: RT

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