US debt impasse weighs on stocks

[July 25, 2011]  LONDON (AP) -- Global stocks started the week on a flat note as investors waited to see if U.S. political leaders can reach a deal to raise Washington's debt limit and avoid a default that would send shock waves through the global economy and financial markets.

With concerns over Europe's debt crisis easing following last week's bailout package for Greece, investors are focusing on whether the White House and congressional Republicans can raise the debt ceiling by the Aug. 2 deadline. A default would mean the U.S. government could not pay all its bills starting next month, including interest and principal on Treasury bonds.

"With a fiscal crisis in Europe temporarily postponed the focus of the markets has now shifted towards the U.S. and the continued wrangling between Democrat and Republican politicians with respect to raising the debt ceiling, as well as agreeing a budget that will prevent a potentially damaging ratings downgrade from the credit ratings agencies," said Michael Hewson, market analyst at CMC Markets.

On one hand, many Republicans are averse to raising taxes as part of a compromise deal while the Democrats are insisting that they will have to play their part alongside spending reductions.

Though most investors think a last-minute deal to raise the $14.3 trillion borrowing limit will eventually emerge, the failure to come to a deal may leave a lasting impact on investor sentiment. A big worry in the markets is that only a short-term deal will be agreed, with a promise to revisit the issue later. The problem is that next year is election year.

"Common sense decrees that some kind of an increase is likely at the 12th hour, but as with the Europeans, the inability to act more quickly and more decisively is confidence-sapping," said Kit Juckes, an analyst at SG Securities.

In Europe, the FTSE 100 index of leading British shares was down 0.2 percent at 5,924 while Germany's DAX fell 0.2 percent to 7,314. The CAC-40 in France was 0.4 percent lower at 3,825.

Wall Street was heading for a lower open, too -- Dow futures were down 0.7 percent at 12,532 while the broader Standard & Poor's 500 futures fell 0.8 percent to 1,331.

So far, the dollar has drifted downward as the negotiations have dragged on but has not come under sustained selling pressure. debt impasse. By late morning, it was trading 0.1 percent higher at $1.4387.

Analysts said that could change, though, if the debt impasse lasts longer, especially if nothing emerges in time.

Worries over the U.S. debt debate have eclipsed those in Europe after last week's rescue package for Greece reined in fears that the eurozone turmoil would spread to larger countries like Italy and Spain.

Greece is expected to be placed temporarily in default of its debts as part of the rescue deal. Moody's said a Greek default was almost 100 percent certain due to measures to involve private creditors, but markets had anticipated as much for weeks.

Earlier in Asia, Japan's Nikkei 225 closed down 0.8 percent at 10,050.01, while Hong Kong's Hang Seng Index lost 0.7 percent to 22,293.29.

China's Shanghai Composite Index slid 3 percent to 2,688.75. That was their biggest one-day loss in six months as railway-related shares plunged after a weekend bullet train crash that killed 38 people raised doubts about rapid expansion of the high-speed rail network.

Oil prices were trading around the $100 a barrel mark. Benchmark oil for September delivery was down 44 cents to $99.43 a barrel in electronic trading on the New York Mercantile Exchange.

[Associated Press; By PAN PYLAS]

Joe McDonald in Beijing contributed to this report.

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