The Debt Ceiling is set by Congress and limits the amount of debt that can be borrowed by the US Government administration.  The structure of the US political system allows the government administration to make spending decisions, but that same administration is limited to a maximum borrowing limit by Congress – a kind of check and balance on the administration.
The current negotiations are similar to those we saw around two years ago.  The fact is that the US government currently spends more than it receives in taxes, and so needs to borrow to fund the deficit.  It is expected that the current debt ceiling will be reached on around 17th October.

The Republican-led Congress wants the current US government to reduce its expenditure, especially in relation to President Obama’s health policy.  The Republicans are refusing to raise the debt ceiling without the government agreeing to spending cuts, and are using the threat of debt default as a bargaining tool in their political posturing.

If the debt ceiling were not raised, effectively the US government would be unable to borrow.  The impact of such action would likely result in a partial default on any government debts that were coming due for repayment.  With US government treasuries being used as a proxy for low risk assets in financial transactions, a default could lead to significant turmoil in financial markets.

Share markets both in the US and locally have fallen in recent weeks, but not significantly given the circumstances.  Such share price action indicates that markets do not expect a default to occur and that while debt ceiling negotiations are likely to go “down to the wire”, an agreement of sorts will occur.

While no one knows the extent to which the political forces in the US will go with their negotiations, there is no doubt as to the impact of a US debt default.  For that reason alone we expect a resolution to the current stalemate, and expect to look back on current share market weakness as an opportunity to buy for those in a position to do so.  For those already invested, it is another one of those times to remain calm and not panic.  After all, we have seen this pantomime before.