Investors worried as US debt default looms

Federal workers demonstrate for an end to the U.S. government shutdown on the west front of the U.S. Capitol in Washington, October 13, 2013.  © Jonathan Ernst
Anxiety is growing in the bond market as the US gets closer to a potentially catastrophic default if Congress does not raise the $18.1 trillion debt ceiling by November 3.

Neither the House of Representatives nor the Senate have offered a bill which would allow Washington to escape disaster. The US can avoid a default only if Congress either increases this limit, or suspends it. Instead, Republicans and Democrats are exchanging verbal jabs and not proposing a way to solve the problem of impending default, which, according to the FT, “would shake the world financial system and faith in the US.”

Democratic Senator Chuck Schumer called the Republicans’ drafts for cracking the debt problem “are nothing more than default and economic collapse by another name.”

While most investors and analysts believe the Congress will be able to avoid a default, the very prospect of exceeding the debt limit, has affected financial markets.

The US Treasury cancelled a sale of two-year debt slated for next week due to fears Congress won't act in time to raise the debt ceiling.

The Treasury specifically cited "debt ceiling constraints" caused by the current "impasse" in Washington.

The two-year note sale was scheduled for October 27. And the date that sale would settle - or go through - was scheduled for Nov. 2.

“Messing around with the debt ceiling is like wandering around in the traffic on Pennsylvania Avenue. You might be able to wander around blindfolded in the traffic and be OK . . . But it seems a fairly insane experiment,” FT quotes Larry Summers, a Clinton administration Treasury secretary as saying.

Raising the debt ceiling has been less than routine for the Obama administration. The country faced similar crises in 2011 and 2013. In 2011, this led to a decrease in the credit rating of the United States and in 2013 to a government shutdown for hundreds of thousands of civil servants.