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.

Mr Song noted that this would come on top of the shutdown, which has left civil servants, contractors and creditors unpaid. He said American consumers may shut their wallets and the US economy could take a large hit, undermining the fragile global economic recovery.

For Singapore and the rest of Asia, a weaker US economy could result in reduced demand for the region's exports, said OCBC economist Selena Ling.

She estimated that China would have the most to lose. Within Asia, it had the highest share of exports - 17.4 per cent - headed to the US between 2009 and this year. Singapore shipped only 9.9 per cent of its goods to the US, among the lowest in the region.

For now, most analysts are not seriously expecting a US default; since 1960, Congress has acted 78 times to raise the debt ceiling, most recently in an eleventh-hour decision in January this year.

But US President Barack Obama warned on Wednesday that the continuing impasse over government spending that led to the federal shutdown on Monday has raised the chances of a stalemate on the debt ceiling as well.

"This time, I think Wall Street should be concerned," Mr Obama said.

On Thursday, the US president called for action by John Boehner, the speaker of the House of Representatives, which has blocked moves to pass a budget and end the shutdown.

"John Boehner won't even let the bill get a yes or no vote bc he doesn't want to anger the extremists in his party," Mr Obama said in a speech at a construction company not from from Washington.

"My simple message today is call a vote. Call a vote Take a vote, stop this farce, and end this shutdown right now"

fiochan@sph.com.sg

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