The Australian market might be trading slightly higher today but don’t read too much into it. Its direction over the next week depends on how effectively the US can sort out the political impasse over its debt repayments.

An address to the nation this morning (local time) saw President Barack Obama try to spell out why his approach to dealing with the debt issue was better than the Republicans. He said that in the past raising the debt-ceiling was routine.

“Since the 1950s, Congress has always passed them and every president has signed it. President Reagan did it 18 times, George W. Bush did it seven times and we have to do it by next Tuesday … or else we won’t be able to pay all our bills.”

The difference this time is that if politics gets in the way and it is blocked in Congress, for the first time in the US’s history its AAA credit rating will be downgraded. This would send the message to investors that the US can’t be relied on to meet its debt obligations and that the political situation is so dysfunctional that sovereign risk is on high alert.

“Interest rates would skyrocket on credit cards, on mortgages and on car loans, which amounts to a huge tax hike on the American people. We would risk sparking a deep economic crisis. This one caused, almost entirely by Washington,” said Obama.

“So defaulting on our obligations is a reckless and irresponsible outcome for this debate and Republican leaders say they agree we must avoid default. But the new approach that Speaker Boehner unveiled today, which would temporarily extend the debt ceiling in exchange for spending cuts, would force us to once again face the threat of default just six months from now.”

The impasse seems to boil down to the frequency and speed with which the debt limit should be increased. Obama and the Democrats want to raise the ceiling once through the 2012 election year whereas the Republicans want the ceiling to be lifted in two stages which would add $US1 trillion to the debt ceiling in return for equivalent spending cuts. The short-term fix would fund the government until early next year, during which time a bipartisan commission would be set up to identify a further $US3 trillion in savings over 10 years.

A coalition of investment advisers and asset managers including Blackrock joined forces to publish an open letter to President Obama and all members of Congress calling on the nation’s leaders to “fix the deficit for real”.

“Addressing the current federal debt ceiling crisis, by itself, is no fix at all. We would be deluding ourselves as a nation,” the letter said. “If we want strong economic growth and job creation, we must fix the deficit for real, for good, for the future of all Americans.”

The non partisan letter is a plea to both sides of politics to get their act together and come to an agreement.

The US has until Tuesday and it is hard to imagine that an agreement won’t be reached. But between now and then global financial markets can expect a wild ride.

aferguson@theage.com.au

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