Wednesday, October 16, 2013

ASX boss warns of "dramatic consequences" of US default

By Business editor Peter Ryan

The chief executive of the Australian Securities Exchange has warned of "dramatic consequences" if the United States defaults on its debt obligations.

While Elmer Funke Kupper believes President Obama will strike a last minute deal with US republicans, he says the deadlock over raising America's US$16.7 debt ceiling has already damaged America's international standing.

Mr Funke Kupper has echoed predictions from other heavyweight investors that the US Congress understands the potentially catastrophic consequences of a US debt default.

"The ongoing assumption must be that it won't happen. I would still be hopeful that the US parties would know that would have very dramatic consequences for the world economy," Mr Funke Kupper told the ABC's AM program.

"I think it's fair to say that even if it's just theatre the US will have done damage to its international standing irrespective because we cannot have the number one economy in the world going through this every year."

As the debt ceiling impasse remains unresolved, Wall Street investors have started to factor in the likelihood of steep losses if the deadline passes without a deal.

The Dow Jones Industrial Average ended 0.87 percent or 133 points weaker after the Democrat Senator Diane Feinstein said talks had broken down.

In a sign of growing risk, yields on 10-year Treasury notes added four basis points to 2.72 percent after touching a three- week high.

Mr Funke Kupper says the perceived safety of US Treasury bills is coming under renewed pressure because of the deadlock and signals that a US default is looming without a deal.

"In the definition of what's safe, US Treasuries are considered safe and have been for the last 50 years," Mr Funke Kupper said.

"So if that gets shaken other things might get shaken too and I think that would be damaging not just for the US but for the world economy."

"I think all investors would like stability and certainty in the long run and I think in the western world we continue to stumble from minor crisis to minor crisis."

China holds approximately US$1.5 trillion of US debt with around US$5.7 trillion of Treasury notes held offshore around the world.

"They fund the United States so one of the consequences of this going wrong is that it will become more expensive to fund the United States and that will only make the problem worse.

"This is why it is so unimaginable that they (the US Congress) would allow this to go so wrong."

The Australian sharemarket is set to open weaker in the wake of the Wall Street falls.

The Australian dollar has backed away from yesterday's four month high after the Reserve Bank signalled that interest could remain on hold for the rest of the year.

But as hopes for a debt deal fade the local currency is lower at 95.1 US cents.

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