Professor Fariborz Moshirian

There is a lot of concern about the deadlock in Washington’s debt negotiations – and it is really uncertain whether the US can hold on to its triple-A credit rating.

Until this week there was confidence that a US debt-ceiling compromise could be reached in time to stave off a US credit downgrade or other damaging outcomes, however talks to resolve this have now dragged on, amid political posturing on the US budget debate, and it is possible the world’s largest economy would default and lose its prized triple-A rating.

The International Monetary Fund has called on US politicians to urgently raise America’s debt ceiling, as both parties dig in and the August 2nd deadline for a possible default on the nation’s debt looms. With only a week left to reach agreement on a plan to raise the debt ceiling, the parties appear as far apart as ever, with each offering competing budget proposals in Congress to cut spending.

However, the US has no choice but to compromise. A default would be catastrophic for the world’s financial markets. The US dollar was once the world’s safe haven currency. Now that is looking ever more uncertain.

Looking at the other worldwide debt crisis in Europe, there is a leadership crisis within the euro zone. Germany and France now are showing more determination to address the underlying causes of financial crisis and they realise that their economic prosperity lies in prosperities of other euro zone member countries. The leadership and political process has been very difficult simply because the eurozone, unlike the United States or Australia, doesn’t have a federal government.

There is though, some reassurance for those in Australia. While we should be concerned about the position in the US and Europe, our investment banks are in a better position, but the future here is still dependent on the US economy. We need the US to come to a resolution in the debt negotiations.

Fariborz Moshirian is a professor of finance at the Australian School of Business, University of New South Wales.