“When the American economy coughs, the rest of the world sneezes”...so goes a saying that has been around for some time. It is one that has a certain basis in fact as what happens to the US economy certainly affects the rest of the world as well.

This is how the global economy has functioned, and attributed to the fact that the US GDP constitutes around 20 per cent of the global economy. There is also the dominant role of the dollar in financial transactions and the volume of overseas investments, including Arab funds, flowing into the US.

It is against this perspective that the ongoing shutdown should be weighed, and more so at a time when the global economy continues to face sundry challenges. Into this volatility comes the issue of raising the US’s debt ceiling with its October 17 deadline.

Even if the budget issue is at its core America’s domestic affair, the matter of the debt ceiling has international ramifications that has the capacity to affect the economies of most countries. It sparks fears of a new crisis whose repercussions may exceed those of the global financial meltdown of five years ago.

What are the possible consequences for the rest of world from a delay in not raising the debt ceiling, estimated at $16.7 trillion (Dh61.3 trillion) and almost equal to the US GDP?

As many countries, including many of the rich Arab economies, are investing hundreds of billions of dollars in US Treasury bonds, the US’s inability to pay off will lead to grave losses, especially since some rely partly on the proceeds from the Treasury to fund their annual budgets and development projects. Furthermore, the global financial situation will be subject to a serious setback if the US fails to pay off debts, especially in view of the unstable conditions from the previous crisis.

Most of Saudi Arabia Monetary Agency’s (Sama) net foreign assets of $690 billion are believed to be denominated in US dollars, putting Saudi Arabia on the list of the world’s top holders of US government bonds. Also, assets of many other Arab countries are dollar-dominated, which means that an extended US crisis will not spare anyone.

Although it is more likely that the US budget will be approved and the debt ceiling raised to allow the country to meet its obligations, this issue will not pass through easily. This is because there is a battle to settle scores between the Barack Obama Administration and his Republican rivals, especially after their opposition to the healthcare programme known as ‘Obamacare’.

All of which could mean that the global economy is in for a jolt, temporary or otherwise. The alternate scenario is the bankruptcy of the US government, a state which can not be withstood by the global economy.

The question here is for how the US will raise its debt ceiling if a deal is effected? The US economy is not at its best, because the balance of economic power now lies elsewhere. The opening of markets and the intensity of competition are factors that are not in the interest of the US economy, which relies on debts to maintain its momentum.

If the situation were to continue like this, the day will come when the US will be unable to fulfil its financial obligations since the debt ceiling might exceed the maximum limit and threaten an outright economic collapse.

It is thus vital to consider the issue of dollar-denominated Gulf and Arab investments. This is because what is happening now is so alarming that there is a need to reconfigure Gulf investments abroad in a more balanced manner to reflect the new economic realities.