US debt crisis reaches stalemate with under a week until deadline

27th July 2011

The report adds that with no compromise in sight over a deal to increase the US's borrowing limit ahead of an 2 August deadline, the IMF chief, Christine Lagarde, warned the political impasse in Washington would have serious consequences for the world economy. "The clock is ticking and clearly the issue needs to be resolved immediately."

Nicholas Cowley, co-manager of the Henderson Horizon US Equity Fund, says: "There are four points. Firstly, this is not over, as US politicians have a habit of leaving it until the last minute before agreeing policy changes. Secondly, neither party wants to be held accountable for a debt default with the presidential election of 2012 just around the corner…Thirdly, postponing the inevitable is also a repeat occurance in US policy… and fourthly, a downgrade by one of the ratings agency is increasingly likely.

"In conclusion, our central expectation remains that the US will avoid default but a loss of its triple ‘A' rating could still occur, markets are likely to remain volatile over the coming weeks as these issues come to a head."

Yet with a week left until the deadline that could potentially see the US default on its debt for the first time in its history, the Guardian reports that Obama expressed dismay over the standoff: "It is a dangerous game we've never played before, and we can't afford to play it now. Not when the jobs and livelihoods of so many families are at stake. We can't allow the American people to become collateral damage to Washington's political warfare."

US money market funds are stockpiling cash in case Congress fails to raise the debt ceiling, distorting the short-term market for US government debt and raising borrowing costs for banks and other financial institutions, reports the Financial Times (paywall).

The funds will continue to hold US Treasuries in the event of a downgrade or default, but they are also building up liquidity and shunning certain securities due to fears that a failure to raise the debt ceiling could trigger client redemptions.

Mindful Money psychoanalyst Ken Eisold writes 'Why the U.S. won’t default on its debt' here

 

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