Debt impasse has US poised for meltdown

The deadline for raising the US debt ceiling may be Tuesday – when the US Treasury will supposedly have more bills to pay than cash in its coffers – but pressure was on last night to get at least the outlines of a deal done before world markets begin opening for the week later today, starting with Asia.

Most market analysts in the US continue to believe the bickering politicians on Capitol Hill will come to their senses. "It seems unlikely that Congress would choose financial Armageddon over some type of compromise," said Joseph Tanious of JP Morgan Asset Management. But there are real fears that further stumbling could cast a deep chill on global markets. That both sides might have a final package in place by tonight that will raise the debt ceiling and cut spending is unlikely. But markets would be calmed if sufficient progress is made.

Signs of trouble multiplied on Friday, notably with a sell-off of short-term US Treasuries. Thomas Tzitzouris, the head of fixed income research at Strategas Research Partners, said: "It's not panic, but we are pre-positioning in case something goes wrong over the weekend."

The Dow Jones swooned further, slipping 0.8 per cent, ending its worst week in a year. Also at risk is Washington's sterling credit rating. Moody's, one of the main rating agencies, said it still expected the US to retain its Triple A status, provided Congress and the White House do a deal.

Citizens had a glimpse of Uncle Sam's predicament late last week when officials noted that the US had $73.8bn in cash to hand, which compares with Apple's reported $75.9bn.

Behind closed doors, the Treasury is planning what happens if the political mess doesn't clear and default arrives. That means deciding what gets paid. One group who will receive special priority are the holders of US debt. The government wants to be sure it can cover $29bn in interest to bondholders due on 15 August.

Some public-sector workers were told to show up for work even if a default means their pay cheques may be halted. Other obligations that the government might not be able to meet could include payments to companies supplying government as well as to veterans and those on benefits.

All would be part of the nightmare scenario that President Barack Obama and others, including the Treasury Secretary, Tim Geithner, have been warning of for months.

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