30 Sep 2013

US debt ceiling crisis looms

7:59 am on 30 September 2013

The United States is facing a government shutdown this week and the possibility that it may default on its debt if Congress does not raise the federal debt ceiling by 17 October.

For timing reasons, at least a short shutdown is looking inevitable after the House of Representatives on Saturday failed to pass a funding bill passed by the Senate.

Republican members of the House instead continue to try to link funding the government and honouring the federal debt limit to delaying or defunding the implementation of President Barack Obama's health care programme, despite it being settled law.

Harbour Asset Management head of fixed interest Christian Hawksby calls default the Armageddon option and says financial markets still expect the Republicans to see reason.

He says the markets have observed a high level of political brinksmanship in the US before, particularly in 2011 and 2012 when there was a very similar situation and the debt ceiling needed to be renegotiated higher.

Mr Hawksby says the market is pricing in a small chance that there is a very bad outcome and no agreement is reached.

He says that's meant equities have come off their highs, the US dollar has strengthened and bond yields have fallen.

Mr Hawksby says New Zealand will be swept up with what is going on globally and in the worst case scenario, the New Zealand dollar will probably depreciate with other non-US currencies.