Australia at risk if US fails to lift 'debt ceiling'

IT IS akin to economic armageddon. Jobs would be lost and the Australian dollar would tumble.

If the United States fails to lift its "debt ceiling" before the end of this month, the government risks defaulting on its debt and sending the world's economies - including Australia's - into a tailspin.

The deal to increase the country's maximum level of debt is hamstrung by Democratic party's government and Republican opponents refusal to compromise.

The Democrats are unmoved by what they see as a scorched-earth tactic by "Tea Party" Republicans to force them into making major changes to its healthcare legislation.

A deadline of sorts was expected for Thursday but data from the Congressional Budget Office suggests the government risks running out of cash somewhere between October 22 and October 31

University of Melbourne Associate Professor Sam Whylie said if it was to default, it would be worse than the collapse of financial firm Lehman Brothers, a failure which caused the Global Financial Crisis.

"It's one thing for a big investment bank to collapse, it really shook people's confidence in the integrity of the global system," he said.

"It's another thing for the United States Government to not be able to pay its debts."

Slowing international growth - caused by the ensuing panic - would lower demand for imports, making for lower prices on key commodities including coal and iron ore.

Australia is so reliant on these that the impact would be immediate and consumers would feel reluctant to spend in part because they are worrying about their jobs.

During the GFC, the Australian dollar fell to 60c. After a US default, the dollar would likely do the same, although it could fall even further south.

"The ordinary person doesn't have a cluse about how the financial system works," Associate Professor Wylie said.

"But they do know a world in which the US can't pay its own debts that something has gone horribly wrong."

The International Monetary Fund and investment banks expect a deal to be done before catastrophe strikes.

That is the hope.OTHER OPTIONS

So the US can't agree on a deal. What other crazy ideas do they have?

All of these are considered "worst case scenario" responses but each are better than a US-Government default.

Print a trillion-dollar coin. This would allow the US Treasury to deposit the "new" money to pay off debts. The smart money is actually on a stack of $10b coins.

Re-prioritise spending - To stop running out of cash, the government could stop paying social security, medicare and military wages and use that money on the debt.

Other: Complicated plan to issue high-interest bonds that would cancel out earlier bonds while earning extra cash for government.

Topics:  australian dollar barack obama republican party

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