Unbalanced budget, overbalanced politics?

Unbalanced budget, overbalanced politics?

It has been billed as the worst financial disaster in the making since investment bank Lehman Brothers collapsed five years ago.

And even as the US scrambles to avoid the catastrophe of breaching its debt ceiling, the nightmare that the world's top economy might run out of borrowed money is likely to keep recurring, until it fixes either its finances or its politics.

Over the last week, the world has watched in fascination and fear as US lawmakers, locked in a bitter fight over a controversial health-care law, held the economy hostage. House Republican leaders refused to approve the government's spending for the year starting Oct 1 and said they would also prohibit the government from borrowing the money it needs to pay its bills, unless their demands to delay the health-care law are met.

The US Treasury estimates it will hit its current credit limit of US$16.7 trillion (S$20.8 trillion) on Thursday, leaving it with funds only from cash on hand and tax revenues. If it is not allowed to borrow more, the US is expected to run out of cash around end-October and would have to slash spending just as large bills are due, including US$6 billion in debt interest payments and about US$60 billion in health-care and benefit payments.

A default on US debt could lead to global financial mayhem.

US bonds, or Treasuries, are considered "risk-free" by markets and held in large quantities by many governments, such as China, Japan and Singapore, and investors. The yields on the bonds - the returns investors demand in return for holding them - are also used to benchmark a range of financial assets. If the US defaulted on its bonds, their prices would plunge and their yields would shoot up, causing market chaos.

The real economy would also be hurt. Without the ability to borrow more, the US must cut spending, at the expense of economic growth and jobs. It would slump into recession, with the rest of the world not far behind - including Singapore, which counts the US among its top export markets.

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