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Summers Sees U.S. Averting Brink-of-Default as Debt Talks Loom

Summers Sees U.S. Averting Brink-of-Default as Debt Talks Loom
Former U.S. Treasury Secretary Lawrence Summers speaks during an interview in Mexico City on Nov. 5, 2013. Photographer: Susana Gonzalez/Bloomberg

Former Treasury Secretary Lawrence Summers predicted that the U.S. will avoid another round of the political gridlock that last month brought the world’s largest economy to the edge of a record default.

“Those who shoot themselves in the foot rarely do it again,” Summers, who also served as President Barack Obama’s top economic adviser, said in an interview late yesterday while attending an event in Mexico City. “So I think it is unlikely that we will reach the brink of default again.”

The Obama administration and the Democratic-majority Senate battled with Republicans in the House of Representatives in October to fund the government and raise a statutory federal debt limit, with a bill finally enacted just hours before the nation was set to exhaust its borrowing authority. The legislation suspended the debt limit through Feb. 7.

“We won a reprieve from the grotesque,” Summers, who is currently a professor at Harvard University in Cambridge, Massachusetts, said while attending a conference held by Grupo Financiero Banorte SAB. “I think it’s right to be alarmed by these developments but I think it’s not right to write America off,” he said. “That’s been a bad bet consistently and I suspect it’ll be a bad bet going forward.”

American political gridlock represents a risk to economic growth beyond U.S. borders, Summers said. The Tea Party wing of the Republican Party that complicated talks on raising the debt ceiling are among the “actors who are the least constructive.”

Tea Party

“I don’t think raising the concerns of nations outside the United States is going to have much of an effect on the motivations or behavior of the Tea Party,” he said. “But clearly in very profound ways, the world system depends upon the United States, and a weakened United States is a weakened global system.”

Summers was in Mexico City to attend a plenary meeting of Banorte, Mexico’s third-largest bank by outstanding loans. Banorte Chairman Guillermo Ortiz was serving in Mexico’s government in 1994 when the U.S. Treasury, with Summers as an undersecretary, organized a rescue loan for the nation in the aftermath of a plunge in its currency. Ortiz later became finance minister and central bank governor.

Summers said Mexico is poised to benefit from economic reforms. President Enrique Pena Nieto’s administration has enacted legislation to increase competition in telecommunications, mandate teacher evaluations for hiring and promotion and levy new taxes to reduce reliance on state oil company revenues.

Mexican Potential

“Mexico has real potential to become a leader in the emerging-market space over the next decade,” Summers said, citing the prospect of changes to energy laws that have limited private participation in the sector since 1938.

Latin America’s second-largest economy may also gain from challenges in the BRIC nations, he said. Summers highlighted “excessive state involvement and populism looming large in Brazil,” and “concerns about stable, reliable governance” in India, along with “extraordinarily authoritarian steps raising questions about property rights in Russia” and “many, many uncertainties that hang over China.”

Mexico stands to benefit from China’s rising labor costs and the U.S.’s adoption of less labor-intensive manufacturing with the application of new technology, he said.

Summers, who withdrew his name from consideration to succeed Federal Reserve Chairman Ben S. Bernanke, said he plans to continue teaching at Harvard, write and speak on economic issues and serve on the board of mobile-payments company Square Inc. He said he has no plans to re-engage in public policy.

“You never know what will happen in life but my focus right now is on the work I’m doing as a professor at Harvard and the various public activities I’ll be engaged in on the outside,” he said.

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