RBA says US default would have hurt growth

Written By Unknown on Jumat, 18 Oktober 2013 | 15.02

A US debt default would have hurt the world's largest economy but it is unclear what the wider impacts would have been, the head of the Reserve Bank of Australia says.

Failing to raise the US government's borrowing limit would have hurt economic growth because drastic spending cuts would have been needed, RBA governor Glenn Stevens said.

"Most of us would have worked out a few contingencies but the truth is we really don't have much idea how that would have gone," he told an Australian British Chamber of Commerce Business lunch in Sydney.

"It isn't difficult to contemplate ways in which it would have gone very very badly, but we really shouldn't be in a position of ever finding out, and I hope we won't be."

The US congress has passed a budget that allows the government to operate until early 2014, raising its borrowing limit and ending a partial US government shutdown.

Mr Stevens said the two week shutdown would have only a short term impact on the US economy.

"The shutdown itself probably had some dampening impact, but my guess would be that probably won't linger once everybody is back to work and in many instances people will be back-paid," he said.

"I don't think there should be a big impact on demand in the US resulting from that."

Mr Stevens also told the business function that post-global financial crisis reforms should not be taken lightly.

Since 2008, the Group of 20 nations has agreed on a series of banking and financial reforms in an effort to prevent another financial crisis.

"Let me be clear this is not a call for current reform efforts to stop, or to be watered down," he said.

"It is about ensuring we focus our finite energies and resources on the most important problems, and getting industry to do the same."

Mr Stevens said the most important reforms are the Basel III international banking rules.

Among other things, they require banks to have sufficient high-quality assets, such as government bonds, which they can sell when funds are needed.

Other significant measures, Mr Stevens said, are the oversight of institutions outside normal banking regulations, known as shadow banking, and addressing the problem of institutions that are "too big to fail".


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