US debt ceiling nightmare looms

US debt ceiling nightmare looms

Three days of United States government shutdown have so far failed to faze global markets.

But investors are starting to take notice of a more crucial issue: that the US government will soon run out of money if it does not raise its debt ceiling.

Failure to do so could damage not only the United States but the rest of the global economy, International Monetary Fund chief Christine Lagarde warned on Thursday.

"It is 'mission-critical' that this be resolved as soon as possible," she said in a speech in Washington, ahead of the IMF and World Bank annual meetings next week. She said growth in the United States has already been hurt by too much fiscal consolidation, and will be below 2 per cent this year before rising by about 1 percentage point in 2014.

On Tuesday, US Treasury Secretary Jacob Lew said that the government has started to use extraordinary measures to stay within its current debt limit of US$16.7 trillion (S$21 trillion), but that it will exhaust these manoeuvres by Oct 17.

The US Congress has until then to agree to raise the debt ceiling, allowing the government to borrow more to fund its spending. If it fails to do so, the US will be left with about US$30 billion in cash and may not be able to pay its bills, including the interest on US government bonds - triggering the first US default in history.

Such a move may strip US Treasuries of their status as the safest assets in the world, raising US borrowing costs, upending global financial markets and causing massive damage to business and consumer confidence.

The fallout would also likely spread to Asia, where China and Japan are the biggest holders of US debt, with US$1.3 trillion and US$1.1 trillion respectively. Singapore holds about US$81.5 billion in US Treasury securities, noted CIMB economist Song Seng Wun.

In a worst-case scenario of a US default, the US' credit rating may be cut and the US dollar would plunge, he said.

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