US Economic Armageddon

25 Jul 11

Barack Obama has warned the US economy is on the brink of an "economic Armageddon'', after congressional leaders once again failed to reach an agreement over the weekend to increase the nation's debt ceiling.

Wall Street now faces not only one, but two sticky situations.

No longer is the only concern that the US will fail to increase the federal limit on borrowing before the August 2 deadline, but now also that political posturing on taming the nation's debt will lead to a downgrade from ratings agencies.

The President called an emergency bipartisan White House summit late on Friday after talks on forging a compromise blending ambitious deficit-cutting plans with raising the $US14.3 trillion ($A13.24 trillion) US debt limit collapsed amid angry finger-pointing.

He warned US lawmakers that Wall Street had already been spooked by the looming possibility that the world's largest economy could default on its debt if no deal on raising the ceiling was reached.

"I think it's very important that the leadership understands that Wall Street will be opening on Monday and we better have some answers during the course of the next several days," he said.

Washington hit its debt ceiling on May 16 but has used spending and accounting adjustments, as well as higher-than-expected tax receipts, to pay its bills and continue operating up to that fast-approaching deadline.

Republican House Speaker John Boehner walked out of discussions on Friday, claiming President Obama was insisting on increasing tax revenue collected from the rich and wealthy corporations.

Republicans have insisted that cuts can be achieved through rolling back portions of the health-care law that was pushed through over their opposition in 2010.

Ratings agencies Standard & Poor's and Moody's have threatened the United States with a downgrade if politicians cannot reach a deal to raise the debt ceiling by August 2.

"There are no options other than a legislative solution. And it will require legislation, and we assume that Congress will do the only responsible thing and extend the debt limit," a Standard & Poor official said yesterday, stressing the deal should last through Obama's November 2012 reelection bid.

"We can't put the markets through gyrations over and over again."

Hamish Douglas, CEO of Magellan Financial Group yesterday told ABC's Inside Business that while the situation did hold the potential for a financial calamity, "every degree of logic in my mind would tell me that the risk of the debt ceiling not being lifted prior to August 2 is very low", Mr Douglas said.