Top global bankers warn of financial catastrophe if US defaults

Heads of some of the world's biggest banks have warned of global financial catastrophe as the US Senate failed to break an impasse and arrive at consensus on measures to avoid a possible government default on its huge debt.

Deutsche Bank co-chief executive Anshu Jain, JPMorgan Chase chief executive Jamie Dimon and BNP Paribas chairman Baudouin Prot on Sunday warned of terrible consequences if the United States defaulted on its debt.

Their warnings coincided with a meeting of leaders of the Republican and Democrat members of US Senate called to break a deadlock over the spending level that resulted in the shutdown of the government two weeks ago.

Speaking at an economic conference organised by a German business newspaper, Jain, Dimon and Prot said a default would have dramatic consequences on the value of US debt and the dollar, and likely would plunge the world into another recession.

Sunday's talks between the Democratic and Republican leaders of the Senate, however, failed to break the impasse and left a possible default on government obligations still looming.

US senators also tried to play down fears that a default on government debt this week would cause a downgrade of the nation's credit rating, although, in private, they stare at the size of US debt that has surpassed the $16.7 trillion mark.

Both Republicans and Democrats are willing to help reopen the government and raise the $16.7 trillion debt limit, but only as part of broader deal on deficit savings, changes to the health care law known as Obamacare and an easing of across-the-board spending cuts that the White House and Congress both dislike.

The Budget Control Act of 2011 established the $967 billion spending cap for federal government spending in fiscal 2014, $21 billion less than the post-sequester fiscal 2013 level. If Congress doesn't pass legislation to reduce spending or alter the cap before January, a second round of automatic discretionary spending cuts goes into effect.

As the political standoff continued, Democrats have warned that a lack of movement this weekend may have an effect on financial markets.

 Meanwhile, the dollar dropped 0.5 per cent to 98.10 yen on Saturday in early morning trade in Sydney.

The US currency depreciated 0.2 per cent to $1.3566 per euro, after sliding on 3 October to an eight-month low of $1.3646 while the euro in turn weakened 0.3 per cent to 133.08 yen.

International Monetary Fund managing director Christine Lagarde said the congressional deadlock over the US debt ceiling is threatening the US and world economies, and she cautioned against ''creative accounting'' to avoid default.

 ''If there is that degree of disruption, that lack of certainty, that lack of trust in the US signature, it would mean massive disruption the world over,'' Lagarde said in an interview on NBC's ''Meet the Press'' programme. ''And we would be at risk of tipping, yet again, into recession.''

US stock markets will be open on the federal Columbus Day holiday tomorrow. Bond markets will, however, be closed.

''I worry on Monday when the American markets open'' whether ''the stock market will go down'' and ''interest rates go up,'' Senator Charles Schumer, a New York Democrat, said.

US government bonds are held across the world by many countries along with the dollar as reserve money and a US debt default would undermine the value of its paper.

China, the largest foreign holder of US debt, with $1.28 trillion in Treasuries as of end-July, has called for a new international reserve currency to replace the dollar ''so that the international community could permanently stay away from the spillover of the intensifying domestic political turmoil'' in the US.

Japanese finance minister Taro Aso said in an interview 11 October with Bloomberg TV that it was up to the US to resolve its debt impasse, not for Japan to fret over its investment in Treasuries. Japan held $1.14 trillion worth of US Treasuries at the end of July, the second-largest foreign holder, according to data from the Treasury Department.

The impasse ''is wreaking havoc around the world,'' Senator Bob Corker, a Republican from Tennessee, said on Fox News Sunday. ''I hope over the next week we will reach a conclusion. I think we will.''