US crisis rattles NZX

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Experts confident common sense will prevail as time finally runs out for fiscal cliff talks.

New Zealand's sharemarket was dragged downwards yesterday as talks stalled in the United States over its looming "fiscal cliff".

The deadline for reaching a plan to avert tax hikes for virtually every American worker and block sweeping spending cuts is due today at 6pm New Zealand time.

The NZX 50 fell 14.389 points, or 0.4 per cent, to 4066.513 on its last day of trading for 2012, although the index was up 24.2 per cent for the year.

ASB Bank senior economist Jane Turner said the stalled talks in Washington were likely to have affected the New Zealand stock exchange as there was little economic or financial news around in the holiday period.

"The uncertainty is likely to continue if it remains unresolved. However we do believe common sense will prevail."

Tyndall senior portfolio manager James Lindsay said the talks were weighing on people's minds, particularly as there did not appear to be an easy or quick fix.

"In previous times it has got close [to an agreement] - now it's down to the wire it has unsettled people."

Talks in Congress were expected to begin again today at 5am New Zealand time. America faces the fiscal cliff because the tax rate cuts enacted in 2001 and 2003 during President George W. Bush's Administration expire on December 31.

The pending across-the-board reductions in government spending, which will slice money out of everything from social programmes to the military, were put in place last year as an incentive to both the Republican and Democratic Parties to find ways to cut spending.

That solution grew out of the two parties' inability in 2011 to agree to a grand bargain that would have taken a big bite out of the deficit.

Unless President Barack Obama and Congress act to stop them, about US$536 billion ($650 billion) in tax increases will begin to take effect in January.

That will be coupled with about US$110 billion in spending cuts, about 8 per cent of the annual budgets for most federal departments.

Lindsay said the fear was that if there was no change to the tax increases and spending cuts the US could go back into recession.

"If there isn't an agreement then the changes could have some hefty ramifications. If the US went back into recession it would be a pretty tough environment for the world to cope with."

Turner said that whatever solution was reached was likely be a drag on US growth, particularly in the first quarter of the year.

The slowdown in the US could also have flow-on effects to China if demand for China's manufacturing slowed down, she said.

"They do have to come to a solution otherwise they risk losing credit ratings from two main agencies. The key thing is resolving the uncertainly holding back growth in the US."