|Markets and investors increasingly nervous over US debt crisis|
|News - Latest|
|Friday, 29 July 2011 08:30|
Global markets are becoming increasingly edgy about the US debt debate amid fears that a deal might not be reached before Tuesday’s deadline and the country could default.
But views are divided over the issue with some experts saying that not reaching a deal is unthinkable while others say it is better to make the right decisions rather than rush and make a botched job.
The Republican infighting further delays any compromise with Democrats to stop the countdown toward Tuesday when the government says it will run out of money to pay all its bills.
Lawmakers must lift the government's $14.3 trillion borrowing limit by Tuesday or risk a devastating default and downgrade of the top notch credit rating that helps make US debt a pillar of the global financial system.
‘In our view whilst the political point scoring will likely continue, adding to an already fractious situation, it is still very likely that the US will raise the debt ceiling next week. This is very unlikely to avoid a downgrade but it will be better than nothing,’ said Felix Martin, economist at F&C’s Thames River Global Credit Team.
A default by the US government would have dramatic consequences, which is why it is extremely unlikely to occur, according to Dan Morris, global strategist at J.P. Morgan Asset Management.
‘The long term fiscal outlook for the country has arguably improved, however, because even if no deal is struck now the dialogue has fundamentally changed. Both political parties and the president agree that a multi trillion dollar reduction in the deficit over the next decade is necessary, even if they do not agree on the means,’ he said.
‘Reforms to the US pension and health care programmes are being considered. A plan may not emerge until after next year's presidential election, but at least a dialogue (of sorts) is taking place. This is progress,’ he added.
Mike McCudden, head of Derivatives at Interactive Investor sides with those who believe a deal must be done. ‘Despite a debt deal not looking any closer, the reality is that one will be made, because the alternative is unthinkable. If no deal were struck by 02 August, default would soon follow as the Government would quickly be unable to meet payments for things like interest on its debt, welfare benefit and military pensions,’ he said.
‘We would see the Dollar collapse, which would jolt global trade. The Dollar is the world's reserve currency, underpinning global financial systems. Globally, countries hold US Dollars, US debt and Dollar denominated debt. On default, the world would face a financial crisis of significant proportions. We could see gold breaking through $2,000 in the short term, along with widespread political unrest,’ he explained.
‘Interest rates will probably rise, and the run on US Treasuries would mean yields will be higher. All of this will make it more difficult for US to borrow money. We could even see a second crash for the US housing market, and ultimately mass unemployment as businesses batten down the hatches,’ he added.
He believes that the impact in the UK would be particularly acute. ‘The US is the UK's largest export partner, ahead of Germany and France, accounting for $50 billion in trade in 2010 alone. The impact of the US defaulting would be felt around the world for a very long time. How close to the wire the Government ends up going only time will tell, but the simple fact is a solution must be found.
Nevertheless, the political points scoring that has caused the delay could still be viewed negatively in the eyes of both investors and the ratings agencies,’ he said.
Andrew Westenberger, finance director of investment bank and brokerage Evolution Group, believes it is ‘pretty awful’ at the moment as markets have slumped in recent weeks on concerns over the European and US sovereign debt crises.
Westenberger said he expected American authorities would eventually reach an agreement over the United States' debt position but added that market uncertainty would remain. ‘I'm sure there will be some resolution in the US, but I don't think that will mark the end of the saga,’ he said.
Investors are growing more nervous with each passing day and that has sent American stocks on a five day slide. This trend is expected to reverse once news of a deal breaks, but the joy could be temporary. Any bill, regardless of which party puts it forward, will contain spending cuts that function like a reverse stimulus package.
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