With just a few days to go until the US potentially defaults on its national debt, Mike McCudden, Head of Derivatives at Interactive Investor (www.iii.co.uk), gives his thoughts on the debt talks and what default could mean for investors.
"Despite a debt deal not looking any closer, the reality is that one will be made, because the alternative is unthinkable. If no deal were struck by 2 August, default would soon follow as the Government would quickly be unable to meet payments for things like interest on its debt, welfare benefit and military pensions.
"We would see the Dollar collapse, which would jolt global trade. The Dollar is the world's reserve currency, underpinning global financial systems. Globally, countries hold US Dollars, US debt and Dollar denominated debt. On default, the world would face a financial crisis of significant proportions. We could see gold breaking through $2000 in the short term, along with widespread political unrest.
"Interest rates will probably rise, and the run on US Treasuries would mean yields will be higher. All of this will make it more difficult for US to borrow money. We could even see a second crash for the US housing market, and ultimately mass unemployment as businesses batten down the hatches.
"Here in the UK, the impact would be particularly acute. The US is the UK's largest export partner, ahead of Germany and France, accounting for $50bn in trade in 2010 alone.
"The impact of the US defaulting would be felt around the world for a very long time. How close to the wire the Government ends up going only time will tell, but the simple fact is a solution must be found - so one will. Nevertheless, the political points scoring that has caused the delay could still be viewed negatively in the eyes of both investors and the ratings agencies."
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