Contingency plans ready as row drags on
Australia's key financial players have put contingency plans in place ahead of Thursday's deadline to raise the limit on America's $US16.7 trillion debt.
Australia's major banks have been raising holdings of liquid assets such as cash and short-term cash, as well as ensuring funding channels with Asia and Europe remain open. The Australian Securities Exchange has been running stress tests to prepare for a possible rise in sharemarket volatility.
With talks in Washington over raising the debt ceiling going down to the wire, investors in Australia and Asia have remained on the sidelines while the impasse played out.
Australia's benchmark S&P/ASX 200 Index inched up 3.8 points to 5262.9 while Japan's Nikkei drifted higher. Hong Kong ended the session down.
Expectations were growing late on Wednesday that Democrat and Republican leaders in the US Senate could soon announce a deal to extend the US government's borrowing authority until February 7 and quickly reopen federal agencies that have been closed since October 1.
Even so, the US's AAA credit grade was placed on rating watch negative by Fitch Ratings, which cited the government's failure to raise its borrowing limit as the Treasury's deadline for exhausting its borrowing limit nears.
"The political brinkmanship and reduced financing flexibility could increase the risk of a US default," Fitch said. Fitch reiterated that it expects the debt ceiling to be raised.
But business leaders have become increasingly frustrated with events in Washington.
On Wednesday, CSL's chief Paul Perreault described the US government shutdown as "US politics" but tipped a result before the Thursday deadline.
"I think they'll work it out and we'll move ahead. They always seem to meet the deadline at some point."
On Wednesday, the view in financial markets was that if the US government defaulted it would only be a "technical" default because the US government will only be unwilling to make some debt repayments, rather than being unable to.
But FIIG Securities director Mark Todd warned there may be repercussions.
"If the law of the land doesn't allow you to pay, then it's the same thing," he said.
One Treasury source told BusinessDay the potential effects from a technical default remained a worry.
"If you own US Treasury bills which mature in the next couple of weeks, not just the interest payments but the whole thing matures, then clearly you don't want to be owning them if you can avoid it," the source said.
"You also don't want to be taking them as collateral ... it's safe to say it will cause a lot of disruption, but the bigger question is, will it cause massive knock-on effects? I think everyone hopes we don't conduct that experiment because no one knows the answer."
ASX chief Elmer Funke Kupper this week said the bourse was well insulated. "The good news is [that] as an exchange we don't hold US Treasuries as collateral. Our collateral's cash," he said.
Based on their projections, Goldman Sachs economists believe the US Treasury department should have enough money to last through to next week. "[But] that said, given the volatility in the Treasury's daily cash flows, as the Treasury's cash balance dwindles the risk of a failure to make scheduled payments increases," Goldman said to clients.