TONY Abbott's new finance spokesman, Barnaby Joyce, believes the American government may default on its debt, triggering an "economic Armageddon" that will make the recent global financial crisis pale into insignificance.

The Age - 11th Dec 2009 - By MARK DAVIS NATIONAL EDITOR

TONY Abbott's new finance spokesman, Barnaby Joyce, believes the American government may default on its debt, triggering an "economic Armageddon" that will make the recent global financial crisis pale into insignificance.

He has also proposed that the Federal Government should introduce laws allowing it to break up the assets of the four main banks  and use them to force banks to hold down interest rates.

"You don't even have to break them apart," he said. "But you have to suggest to them that those powers could be in place to do that if they aren't more diligent in how they respect the Australian community."

Senator Joyce came under attack from several ministers, including Treasurer Wayne Swan, who said he had been elevated "straight from the reactionary fringe of our economic debate to the second most senior economic policymaking job in the alternative government".

In an interview with The Age, Senator Joyce said he did not want to alarm the public, but there needed to be a debate about Australia's "contingency plan" for a sovereign debt default by the US or even by an Australian state government.

"A default by the US means complete economic collapse around the world and the question we have got to ask ourselves is where are we in that?" he said.

He said the chances of a US debt default were distant but real, and politicians were not doing the electorate a favour by refusing to acknowledge the risk.

Senator Joyce first warned of America defaulting at a Senate estimates hearing in October where he asked Treasury secretary Ken Henry for his views.

Dr Henry warned then that public figures had to be careful about discussing "hypotheticals that are that extreme" because such discussions could be misinterpreted in the community.

Rather than tempering his language since his promotion, Senator Joyce has stepped up the rhetoric, saying he also had concerns that some states would have trouble repaying their borrowings.

"The first thing you tell a new client is exactly where they are. We have to tell the Australian people precisely where they are," said the former accountant from the Queensland town of St George.

"The Federal Government has $115.7 billion in debt, Australian government securities, notes and bonds on issue, and the states have another $170 billion in debt," Senator Joyce said.

"We have to ask whether the states have the capacity to repay that. I would say in some instances they do not  particularly Queensland."

Senator Joyce said that if the US recovered, global funds would flow back into North America. He said the only way Australia could keep capital flowing into the country would be to increase interest rates.

"That is the first scenario, which is extremely bad for Australia.

"The worse scenario is where the United States doesn't repay their debt  the $US2 trillion in debt they owe to the Chinese, the $US1 trillion in debt they have to the Japanese and the $US1 trillion in debt to others  and then we are really nailed." That would result in a shift from the US dollar to the yuan, "and China becomes an immensely powerful player overnight".

"If America collapses there will be no more sale of Chinese products to America and therefore very little purchase of Australian resources by China."

"The whole pulse of trade is compromised because people say, 'Why would I trade with the US when it might not pay its debt back?' "

He said this "real financial crisis will mean this preamble we have just had pales into insignificance".

Asked what sort of contingency plan he would advocate, Senator Joyce said it was like trying to prepare for a tidal wave, but the local economy should have more self-reliance.

"Things you look for in that economic Armageddon are the capacity to feed ourselves, the capacity to provide the fundamentals in medicines and basic fundamental requirements for our nation."

His comments about the banks were made later in the day on Sky TV. He said the Government had stood back and watched the centralisation of the sector, resulting in interest rates being hiked "under the cover of darkness".