america could default on its debt next week

Not sure which forum this belongs in but it's certainly political right now...
By ABC business editor Peter Ryan
Barack Obama has warned of global financial chaos if the United States' $14 trillion debt ceiling is not raised soon.

The US president says any signal that the world's largest economy might default on even some of its debt could spook financial markets and plunge the nation into another recession.

America's debt clock is racing towards midnight - with the current limit for borrowings of $US14.3 trillion set to be reached on Monday US time.

Soon, US debt will be through the ceiling with the government adding about $US135 billion every month just to keep current programs running.

President Obama is in a battle with both Democrats and Republicans to have the ceiling raised to around $US21 trillion.

But speaking in a town hall meeting broadcast by the CBS 60 Minutes program, president Obama spoke of the unthinkable and the potentially catastrophic impact that even talk of a US debt default would have on the global financial system.

"If at any point somebody thought, if investors around the world thought, that the full faith and credit of the United States was not being backed up, if they thought that we might renege on our IOUs, it could unravel the entire financial system," he warned.

"We could have a worse recession than we already had, a worse financial crisis than we already had."

With the deadlock set to continue, the US Treasury department is reallocating funds to ensure debt obligations are met for the time being.

In the meantime the Obama administration is try to reach a compromise, although Republicans are refusing to increase the debt limit without deep spending cuts.

House speaker John Boehner says Barack Obama needs to look at everything, including defence and Medicare, but has once again ruled out tax increases on the wealthy to fund the debt.

"I've not seen real action yet and I just think this is the moment. We all know what the problems are. Why don't we just deal with them?" he questioned.

"No more kicking the can down the road, no more whistling past the graveyard, now is the time to deal with the fiscal problems we have in an adult-like manner.

"Everything should be on the table except raising taxes, because raising taxes will hurt our economy and hurt our ability to create jobs in our country."

It might be political brinkmanship, but the prospect of a US debt default is something that financial markets are watching with trepidation.

"I think any form of default on US debt would be seen as catastrophic for financial markets," said Shane Oliver, the chief economist at AMP Capital Investors.

"Obviously it would cause a big loss of confidence in US debt at a time when there is plenty of that debt around and, of course, America is incredibly reliant on it given its massive 10 per cent of GDP budget deficit."

He says that, for now, it is an American problem, but anything even close to the downgrading of America's rolled gold AAA credit rating would bring a new wave of worry for the world, and Australia would not be immune.

"On the one hand, the good news is that Australia doesn't have a debt problem so, in that sense, we are not overly reliant on debt markets globally and so there is not going to be any contagion in Australia's direction," Shane Oliver explained.

"The downside, though, is that if there is anything which threatens the US recovery, and of course the failure to agree on increasing the debt selling could well do that because it could put a cloud over the financing of US, of America's budget deficit, if that uncertainly builds and that has a negative impact on US economic growth then that of course would have a negative impact on Australia."

Shane Oliver says those flow on effects would include higher borrowing costs for Australian households and banks, as well as lower commodity income.

"I think if there was no resolution on the debt ceiling issue, there would be two potential impacts for Australia. One is that US bond yields over time could be pushed up to higher levels which could mean that Australian companies and banks borrowing abroad might have to pay more to obtain that money," he said.

"The second effect could be that if the debt debates and ongoing pressure in the US starts to threaten the US economic recovery, then that of course would also have an impact on Australia, for example their demand for exports and commodity prices as US economic weakness could then flow on and hurt China."

Dave R.