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Americas

Is US insolvency on the horizon?

The spending freeze has paralyzed the US government, and a possible federal default looms. Dietmar Rieg, president of the German American Chamber of Commerce in New York, looks at consequences for the economy.

DW: What consequences does the government shutdown have for the US economy?

Dietmar Rieg: First of all, the up to 800,000 federal employees who have been furloughed are directly affected. They and their household members aren't being paid. Even if their wages are paid out retroactively, the consumer market is currently missing out on a purchasing power of $1.6 billion (1.1 billion euros) per week until then, according to consulting firm IHS. Another direct consequence is that smaller companies in the area of those people affected, say in Washington, D.C. or the national parks, must factor in sales losses because their customers are staying at home.

US citizens and companies are also suffering the concrete consequence that miscellaneous bureaucratic services are not operational. The longer the shutdown lasts, the more it might affect consumer and business confidence in the US economy and thus the country's economic activities - calculations vary depending on which institute you ask. For now, we're waiting to see what will happen over the next few days.

Dietmar Rieg, Hauptgeschäftsführer der Deutsch-Amerikanischen Handelskammer New York Das Bild wurde uns zur Verfügung gestellt von der Außenhandelskammer.

Rieg thinks the consequences for German companies in the US should be limited

Will German companies also be affected?

Companies that work with the US government are affected directly, while companies that have to put up with bureaucratic constraints are only indirectly affected: for example, the US Small Business Administration no longer issues credits for small and medium-sized enterprises. The recruitment of new employees can also be delayed because the Department of Labor can't handle applications for H-1B visas or extensions. People who need up-to-date market data from the Census Bureau, or labor market statistics or support from the IRS are out of luck. Related consequences for German companies in the US should, however, be within limits that can be handled. At the same time, negotiations on the free trade agreement between the US and the EU are stagnating.

The New York Chamber of Commerce, for instance, is affected in that we had planned a foreword by John B. Emerson, the new US Ambassador to Berlin, for the next edition of our trade magazine. The article is still in the process of being approved in Washington – press work is not considered an "essential" government task.

On October 17, the country will reach its borrowing limit. If Democrats and Republicans fail to agree to lift the debt ceiling, the US will be insolvent. How likely is this scenario?

Let's wait and see how the delegates in the House of Representatives and the Senate behave over the next few days. A case of insolvency - rather, an unwillingness to be solvent - has never occurred historically and is difficult to imagine even at this point.

What consequences would a US insolvency have?

A so-called "default" could have extreme economic repercussions, even worldwide, if US government bonds were affected. Businesses and retirement funds would also be affected via the financial markets. US public debt stands at $16.7 trillion at the moment - an incredible amount. The timely payment of interest and principal would be endangered. We would probably have to deal with consequences we can't yet foresee today.

Wall Street has shown no signs of a looming crisis just yet. The financial markets expect an agreement between Republicans and Democrats before the onset of insolvency. Everything now depends on how the Legislative Branch acts in the next few days.

Do you see a free trade agreement between the US and the EU in a positive light, as do the Bertelsmann Foundation and the Ifo institute, who expect 160,000 new jobs in Germany alone?

On both sides of the Atlantic, the free trade agreement involves great chances for economic growth and more jobs. With regard to German-American economic ties, the harmonization of standards and norms could have a positive effect that might serve as a message to other economic regions. Naturally, an expanded economic area with a total of 800 million consumers also promises greater sales opportunities that - apart from all European states - both US and German companies could benefit from.

Some EU politicians, including the Social Democrat's former chancellor candidate Peer Steinbrück, want to suspend the negotiations on the free trade agreement until the NSA spying scandal is cleared up. Are they right?

This issue must be dealt with on a political level.

The Fed continues to pursue its cheap money policy. Do you believe there's a danger of new economic bubbles?

From our point of view, no sector is in danger of overheating. On the cheap money policy, one should say that over the past months, the interest rate for 10-year bonds has already risen by almost a percentage point. Different from Germany's Bundesbank and the European Central Bank, the US Fed has a double mandate: it is supposed to provide price stability as well as full employment. At 7.3 percent, unemployment remains quite high in US terms, so it's not to be expected that the Fed will discontinue all aid programs in the near future.