U.S. politicians will test the faith - and patience - of global investors Monday by failing to agree on a coherent end to their impasse over lifting the country's legislative $14.3-trillion debt ceiling over the weekend.
President Barack Obama was meeting with top Democrats in the Senate and House of Representatives as financial markets opened in Australia. The absence of any Republicans suggested that rather than pulling closer over 48 hours of intensive talks, Washington was instead splitting on partisan lines.
At stake is the U.S.'s reputation as the safest of safe havens for global investors who rely on the bills, notes and bonds issued by the Treasury Department to hedge against riskier trades, as collateral in the thousands of daily transactions and simply as a steady source of income.
There are several reasons for the world's love of Treasuries, but chief among them is the fact that the U.S. government has never missed a payment on any of its debt obligations. This record now is in serious jeopardy because politicians have left themselves no wiggle room in the legislative calendar before Aug. 2, the day the Treasury Department says it will run out of ways to pay the U.S. government's bills without renewed borrowing authority.
Financial markets were uneasy in Asia and Europe on Monday about the prospect of a first-ever U.S. debt default. European and Asian stocks fell 0.4 to 1 per cent. U.S. stock futures prices were also down 1 per cent, suggesting a weaker start on Wall Street later. Gold, the favoured safe haven, rose 1 per cent to a record high.
But there was no panic selling that some politicians in Washington had feared after the weekend talks broke down.
"Talks between U.S. politicians ahead of the Aug. 2 deadline offer headline risk all week," economists at Royal Bank of Canada advised clients in a note on Sunday.
Markets were trading higher toward the end of last week because it appeared Mr. Obama and House Leader John Boehner were on the verge of a comprehensive agreement to raise the debt ceiling and reduce the U.S.'s deficit by as much as $4-trillion over the next decade.
That's the kind of agreement that influential credit rating agency Standard & Poor's said earlier this month would be necessary for the U.S. to retain the firm's top rating.
But negotiations between the White House and Mr. Boehner unravelled after markets closed on Friday. Mr. Boehner abandoned talks, saying the president was too intent on raising taxes. Mr. Obama held an exceptional press conference, questioning Mr. Boehner's ability to lead his party to a compromise and conceding that he had become less confident that a broad agreement to narrow the deficit can be achieved.
While divided over how to tackle the deficit, political leaders continued to say that they would raise the debt ceiling by Aug. 2. That would avoid a default, but might not avert a downgrade of the U.S.'s credit rating.
Standard & Poor's stressed that it is looking for evidence that the political will exists in Washington to take seriously a debt level that is approaching 80 per cent of the U.S.'s gross domestic product. Some economists say debt in excess of that level is too much for a country to handle, and will tend to lead to either dramatic spending cuts or default.
"You don't want politics messing around with America's credit," Treasury Secretary Timothy Geithner said in an interview with CNN on Sunday, explaining why the White House is pushing for a debt agreement that would ensure no more debt-ceiling votes until after the 2012 election.
But it might be too late for that. Even if the debt ceiling is raised, "there's been tremendous damage done to our creditworthiness," Bill Daley, the White House chief of staff, said on NBC's political affairs program Meet the Press.
With a file from Reuters