US debt crisis: Fed under fire as stocks tumble

28th July 2011

The Treasury has until August 2 deadline to raise the debt ceiling. However, the Financial Times (paywall) reports that bankers say they are not getting a response to efforts to discuss the market impact of a failure to reach a deal in Washington or if credit ratings agencies cut the US triple A rating.

Yet global stock markets suffered fresh losses on Thursday as the US debt talks remained deadlocked, leaving investors braced for shockwaves that will rattle the financial world, reports the Guardian.

With no sign of a deal in Washington, investors scrabbled to sell shares when trading began in London. The FTSE 100 fell 43 points to 5813, adding to yesterday's 76-point drop, as traders reacted to the worst day's trading in two months on Wall Street on Wednesday. Other European markets also fell.

Adding to the fears is that although the Treasury may be able to conjure up a short-term solution to prevent default on Tuesday, the row and the failure of America to tackle its burgeoning debt problem could now lose the US its triple-A credit rating.

However, the focus at present is the fact that Congress remained deadlocked over the debt crisis on Wednesday, with House Republicans unable to muster the votes needed to pass emergency legislation before next week's deadline, adds another report in the Guardian.

This report says that faced with a revolt by hardline members of his own party, House leader John Boehner was having to hastily rewrite a bill he proposed earlier in the week to cut $3 trillion (£1.83tn) in federal government spending.

Before today, stock markets remained reasonably sanguine.

Relating to the impact of the US debt crisis talks impasse, Mindful Money blogger Shaun Richards said on his blog that the focus should be on the exchange rate of the US dollar, rather than market moves.

He says: "Whilst it may seem that financial markets are being extraordinarily complacent about the US debt crisis the exchange rate of the US dollar has meant that for overseas investors US assets have become 4% cheaper in quite short order. Moving away from the specific impact of the US debt crisis this has many other consequences." Read more here.

As the deadline looms, investors have grown more pessimistic over a debt ceiling deal that can deliver large, long-term spending cuts and prevent the US form losing its triple A rating.

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