Political wrangling has already hurt the US economy, with growth reduced by the failure to agree a budget earlier this year. That led to across-the-board government spending cuts rather than targeted reductions.
Now on top there is the damage from the partial shutdown of the US government.
But what is really troubling the financial world is that the deadlock could possibly block the raising of the debt limit – that is how much the US can borrow.
Anxiously watching all this – particularly in Asia – are those that have lent money to Washington.
China’s government holds the equivalent of 946 billion euros worth of government bonds. Japan’s isn’t far behind with 840 billion euros worth.
The top five lenders include lots of offshore money and the proceeds from oil sales.
If the debt limit is not raised, the US will not be able to sell more bonds and without that new cash coming in, it risks defaulting on paying back the money it already owes, which would trigger a global financial catastrophe.
The head of the International Monetary Fund Christine Lagarde feels: “It is ‘mission-critical’ that this be resolved as soon as possible.”
In a speech in Washington, ahead of the IMF and World Bank annual meetings next week, she said: “The ongoing political uncertainty over the budget, over the debt ceiling, does not help. The government shutdown is bad enough, but failure to raise the debt ceiling would be far worse – and could very seriously damage not only the US economy but also the entire global economy.”
President Obama warned a debt default would throw the world’s largest economy back into a recession, which the US Treasury said would be worse than what followed the 2007 crisis.
And Obama – using rather more direct phrases than the IMF chief – added “If we screw up, everybody gets screwed up.”
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