US Republicans playing with fire

THE imbroglio over the US government shutdown, and the debt ceiling, might have been just a piece of political theatre had it not been so serious. The fact that a small group of radical Republican lawmakers can engineer an operational shutdown of most of the US federal government for a few days is unpleasant enough for thousands of government workers and millions of Americans who depend on public services.

But when those lawmakers also threaten to prevent the US debt ceiling from being raised - which must be done before Oct 17 - it is a potential threat to not only the US but also the global economy, and has set off alarm bells as far away as Beijing and Tokyo. If the legal limit on how much the US government can borrow is not increased within a week, Washington will not have enough cash to meet its liabilities. The potential consequences of this could be apocalyptic. In particular, there would be doubts over whether the US would be able to make interest payments on its Treasury bills - which are supposed to be the world's safest financial instruments. This explains why China and Japan (the largest holders of Treasuries) are concerned. The wider market consequences of a US default could include, among various things, a sharp hike in US interest rates - which would tip the American economy back into recession and take the global economy down with it, and cause major shocks to financial markets around the world.

Economists caution that it would be complacent to argue that a technical default by the US government - reflecting a temporary, legally created inability to pay rather than an unwillingness to pay - would be no big deal; a default lasting even a few days would cause severe market damage.