Global economy threatened by US

Barack ObamaGlobal markets were on tenterhooks today as the United States edges to the brink of a dangerous debt default which threatens the global economy.

Ratings agency Fitch placed America's prized triple-A rating on negative watch and said political brinkmanship risks the US being unable to pay its bills and threatens the dollar, as tomorrow's debt deadline looms large.
%VIRTUAL-SkimlinksPromo%The FTSE 100 Index opened in negative territory today after Wall Street investors took a hammering last night, with the Dow Jones Industrial Average closing down heavily, while Asian markets also suffered.

US politicians have until tomorrow to raise America's 16.7 trillion US dollar (£10.4 trillion) debt ceiling - lifting the cap on how much it can borrow.

Otherwise they risk the government of the world's biggest economy being unable to honour IOUs on Treasury debt, or pay staff wages or benefit payments to veterans.

A US government shutdown caused by the deadlock, which has seen thousands of staff told to stay at home and closed government departments and museums, is set to enter its 16th day.

US Treasury secretary Jack Lew has warned the country will only have about 30 billion US dollars (£18.8 billion) of cash reserves left - around the current market value of British Gas owner Centrica - if politicians cannot agree to raise the debt ceiling by tomorrow.

"If we have insufficient cash on hand, it would be impossible for the United States of America to meet all of its obligations for the first time in our history," said Mr Lew.

While America would be unlikely to run out of money instantly, it would have to prioritise debt payments, such as an interest payment on its debt due on October 31, meaning other bills could go unpaid. The deadlock has driven up the cost of US government borrowing and hurt the dollar.

The International Monetary Fund (IMF) has warned that a US debt default threatens to trigger a global recession.

Fitch said that while it continues to believe an agreement will be reached to raise the debt ceiling and avoid a default, the delays threaten America's debt rating and could trigger a downgrade.

"The political brinkmanship and reduced financing flexibility could increase the risk of a US default," it said.

Fitch added: "The US risks being forced to incur widespread delays of payments to suppliers and employees, as well as social security payments to citizens - all of which would damage the perception of US sovereign creditworthiness and the economy.

"The prolonged negotiations over raising the debt ceiling risks undermining confidence in the role of the US dollar as the pre-eminent global reserve currency by casting doubt over the full faith and credit of the US."

Republicans and Democrats are reportedly close to an 11th-hour deal which would avoid a default, and will hold meetings today in the hope of striking an agreement to satisfy both parties. Delays have been triggered by disagreement over President Barack Obama's landmark healthcare insurance reforms.

Craig Erlam, market analyst at currency brokerage Alpari, said: "As it stands though, investors remain convinced that a deal will be done before tomorrow's deadline."

But he added: "The damage being done in Congress right now may not be instantly felt, but may be irreversible further down the line."
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