Uncle Sam leaves us out on a limb

Cameron BartramCountryman
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August 2, 2011 — keep that date in mind.

This is the date that if nothing changes (and the US debt ceiling is not raised), the US risks defaulting on its debt obligations for the first time.

Taking a step back, the US debt ceiling is the cap set by Congress on how much the federal government can legally borrow. This number currently stands at $14.3 trillion.

Whether to raise the debt ceiling or not is currently being argued violently in Washington, with Congress at this stage standing firm saying they will not agree to a raise without significant budget cuts and possible taxation increases by the Obama administration.

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US President Barack Obama is currently sticking to his guns and not wanting to increase taxes in any way shape or form.

The answer, when they finally reach an agreement, will, unsurprisingly, be something in the middle.

In what is a high-stakes game of political poker, the ace in the deck is the upcoming US election scheduled for November 8.

Obviously, the Obama administration is not keen to slash spending or raise taxes because it’s political suicide, however, the popular choice and the most fiscally responsible choice aren’t always the same thing.

But one fact remains: if lawmakers don’t get it together by August 2, the United States will no longer be able to pay its bills in full.

Late last week the markets had a nice bounce, led primarily by the financial stocks, upon word that progress was being made to work around the US debt stalemate, and another short-term resolution to the Greek crisis.

Walking into the office on Monday morning the tables were reversed, as news that a whole weekend of negotiations had not resulted in a deal in the US, leading our market to close down 1.5 per cent on Monday.

This hasn’t stopped a number of brokers calling Australian banks as a buy, with Bell Potter, RBS and CitiGroup joining the chorus in recent days.

The fact we’re now a week from the deadline and nothing has been sorted means we’re probably going to see a short-term, stop-gap solution that will ‘kick the can down the road’, similar to the result that we saw from the Greek debt crisis.

For investors, this means we’re likely to see a relief rally on the back of any debt resolution news (again led by the financials), but leaves us firmly entrenched in the nervous long-term investment scenario we currently find ourselves in.

And if the US does default?

Let’s leave that question to next week, shall we?

For more information, contact Cameron Bartram at Sentinel Stockbroking on 9225 0028 or email cbartram@sentinelgroup.com.au

Information contained in this article does not consider your personal circumstances. You should consult a stockbroking professional before making any investment decisions. Sentinel may hold positions in stocks discussed from time to time.

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