What if Washington fails to resolve its fiscal impasse over the US debt limit? That’s the question euro zone finance ministers meeting in Luxembourg are mulling over.
Progress on Portugal, Greece and Ireland are on the agenda but talks on the US government partial shutdown are dominating the discussions.
Olli Rehn, EU Economic and Monetary Affairs Commissioner told reporters: “It is very important that the US could overcome its fiscal deadlock; otherwise it would have potentially dramatic consequences into the real economy and negative ramifications to the still nascent recovery in Europe.”
Although there has been some progress reported in talks between Republicans and Democrats there has been next to no sign of a breakthrough.
The US Treasury has warned of dire consequences if a deal is not reached by Thursday to raise the US borrowing limit.
But some traders are relaxed because no-one they say really knows what will happen.
Market strategist, Michael Ingram said: “It basically thinks it’s so big – the results of a debt default in the US would be so catastrophic to the global financial system – that it’s simply not going to happen and therefore it’s not worth pricing into assets.”
Nevertheless, if the US does default the chances are that world markets would fall dramatically and trigger a rise in global interest rates, as so many are linked to that of the world’s largest economy.