By: Dr. Mike Campbell

The US political elite has yet to agree to extend the nation’s borrowing ceiling. If they fail to come to an agreement before August the USA may default on some of its obligations. In view of the turmoil that is being caused by the prospect of a Greek default, within the next three years, on European and world markets, the cataclysm of even a partial American debt default is too horrific to contemplate. The difference between the two situations is that a US default can be avoided if Senate and Congress pass legislation to raise the cap on US borrowing.

The political brinkmanship is putting the USA’s coveted AAA credit rating at risk, according to Federal Reserve Chairman, Ben Bernanke. A treble A rating means that the ratings agencies view American government bonds as being of the highest investment grade: consequently they are believed to have the lowest default probability of any bond. Bernanke warned that any delay in the US government making its scheduled debt repayments would lead to chaos on global financial markets and could harm the Dollar’s status as the world’s primary reserve currency.

If the deal is not struck by America’s lawmakers (and surely a compromise will be found), if the ratings agencies made good on their threat to downgrade US credit status, it would create a fundamental doubt about America’s creditworthiness – in turn, this would be likely to increase the cost of future US borrowing.

If lawmakers approve an increase of the debt ceiling by $2.5 trillion, the government will be able to operate until early 2013. It will not have escaped anybody’s attention that 2012 is a Presidential election year.