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$12b caught in US debt spiral

AUSTRALIA has $US12.3 billion ($11.2 billion) at risk in US treasury holdings, split between banks, superannuation funds and the Reserve Bank.

AUSTRALIA has $US12.3 billion ($11.2 billion) at risk in US treasury holdings, split between banks, superannuation funds and the Reserve Bank.

Failure to break the impasse in Washington over the debt ceiling will lead to a write-down in the value of the assets and leave Australian owners vulnerable to missed interest payments.

Investors have also been warned about the destabilising knock-on effect if the US loses its AAA credit rating, including mass selling and markets effectively shutting.

The US President, Barack Obama, is due to address the nation at 11am today Sydney time as the clock ticks down to tomorrow's deadline to reach a deal on lifting the ceiling. Although talks appeared close to resolution late yesterday, failure to lift the ceiling will shut government services.

Even if an agreement is reached, ratings agency Standard & Poor's has reserved its views on the country's AAA rating, with a downgrade depending on how much the US says it will save over the next 10 years.

US Treasury figures show the three biggest holders of US government debt are China with $US1.159 trillion, Japan with $US912.4 billion and Britain with $US346.5 billion. Australia is the 34th biggest creditor on the US table compiled in May.

Australia's sharemarket is expected to open lower this morning after hefty losses on Wall Street on Friday. The Dow Jones Industrial Average shed 96.87 points, or 0.8 per cent, to 12,143.24 points, while the broader S&P 500 Index lost 8.4 points, or 0.6 per cent, to 1292.28 points.

Local shares capped their worst monthly performance in more than a year on Friday amid the fear of a US default.

HSBC's chief economist, Paul Bloxham, said a possible downgrade of the US's prized AAA credit rating was "haunting" equity markets. A downgrade could trigger a mass reshuffle of world funds and the offloading of US assets.

"A lot of fund managers, pension funds and hedge funds have mandates to have a certain amount of AAA-rated securities in their portfolios. Probably all of them have US securities," he said.

"There would be a lot of reshuffling and heavy selling ... it's not a comfortable situation to be in."

Westpac's global head of fixed income strategy, Russell Jones, said it would depend on the legal obligation of AAA-mandated investment managers to sell whether US assets were dumped.

"Thankfully it would appear that relatively few are legally obligated to do so," he said. "On the other hand, to maintain the average ratings of their portfolios ... they may have to liquidate holdings of lower quality assets ... and this could cause these markets to seize up."


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