Bankers fear debt catastrophe

Global finance leaders have warned a US debt default would be “utterly catastrophic”, as some analysts flagged a new era of US political dysfunction that could expose the world’s largest economy to increased instability.

Just days before the Thursday deadline to lift the US government’s $US16.7 trillion debt ceiling, some of the world’s top bankers said a default on debt obligations would be too terrible to contemplate and have dire consequences on the global economy.

“World leaders are saying, ‘Get on with it and get this resolved. It’s not just about you’,” said JBWere executive director Mike Kendall.

“This isn’t the time to be tap dancing to the mid-term elections in the US. This affects everyone.”

Federal Treasurer Joe Hockey said on the sidelines of World Bank and International Monetary Fund meetings in Washington at the weekend that he was confident of a political resolution, although markets were “in for a continuing volatile period”.

Financial markets rallied across the board on Friday as US politicians signalled a willingness to push back the debt ceiling deadline as a debate over the budget continued. But talks between the White House and house Republicans broke down as the US entered a long weekend, raising the prospects of another week of market volatility.

“There isn’t life beyond default,” Deutsche Bank chief executive Anshu Jain cautioned during a finance conference in Washington DC.

‘‘This would be a very rapidly spreading, fatal disease ... you’re now talking about the underpinnings of finance,’’ Mr Jain said, describing a default as ‘‘utterly catastrophic’’.

JPMorgan chief executive Jamie Dimon over the weekend said banks had already spent ‘‘huge amounts’’ of money preparing for a default that could hit a post-financial crisis economic recovery.

‘‘It would ripple through the global economy in a way you couldn’t possibly understand,’’ Mr Dimon said. ‘‘We need global growth ... We are on the verge of getting it. Please let’s not shoot ourselves in the foot.’’

Among fallout from the US government shutdown and default fears is a possible delay in the US Federal Reserve’s plans to wind back its $US85 billion-a-month bond-buying program.

This in turn would see the Australian dollar remain at elevated levels against its US counterpart.

The Australian dollar is trading near four-month highs, last trading at US94.68¢. Australian government long-term bonds have been sold off in recent days but are expected to emerge as a safe haven if a debt ceiling deal is not reached.

Despite the dire warnings and nervousness among investors, financial markets have, until now, held their nerve in the face of a possible default. Market strategists argued while the fear of default was real, it appeared unlikely even as the deadline loomed.

The Australian sharemarket has remained fairly resilient, with investors boosted by a lift in business confidence following the federal election.

Even so, some economists warned that the game of political brinkmanship signalled longer-term risks for the US economy.

‘‘More worrisome is the chronic dysfunction in the policy decision-making process that these developments reveal,’’ Citi analysts, including chief US economist Robert DiClemente, said in a note.

‘‘With larger structural deficits only a few years away and the public debt burden already very high, the inability to make timely policy choices may provide the last ingredient in a potentially toxic brew.’’

ANZ chief economist for Australia Ivan Colhoun said the key for the US in exiting its cycle of structural deficits and debt struggles remained a strong economic recovery.

‘‘The prescription has to be that you try and get growth,’’ Mr Colhoun said. ‘‘Growth helps to fix budget deficits, which help to reduce debt.

‘‘It’s definitely not what you want to see continuing. I still believe in common sense, and the commonsense solution is for this [political impasse] not to escalate.’’