NZ has first move on US debt crisis

Markets in New Zealand and Australia will be in the spotlight today to see how they react to last-minute attempts to resolve the United States debt crisis.

Sharemarkets in the Asia-Pacific region will be the first to interpret developments in America and will help set the tone for the rest of the world.

US Senate leader 'cautiously optimistic'

After a weekend of further stalemate, US Senate Majority Leader Harry Reid said he is "cautiously optimistic" that the White House and its Republican foes will reach a deal to avert a ruinous debt default.

With time ticking down to a Wednesday deadline to reach an agreement to raise the amount of money it can borrow to avoid defaulting on its debts, the Democratic leader warned the polarised US Congress needed a solution "in the next few hours" and said "all sides are aware of this urgency."

Reid said a tentative framework for an agreement would lift the US$14.3 trillion US debt limit beyond the November 2012 elections in which President Barack Obama seeks a second term, a key White House demand.

Uncertainty for markets

New Zealand's high-flying currency will also be closely watched, as any further stumbles in reaching a deal between US lawmakers are likely to drive the Kiwi higher still.

Market commentator Arthur Lim said the New Zealand sharemarket was likely to have a "down day" if there was no progress on a compromise.

"It's almost inevitable given we're close to a deadline. Markets never like uncertainty."

But, given that there was a global recovery under way, he did not expect the events in the US to spark the sort of meltdown that occurred in 2008.

"I don't think it will be precipitously bad like it was with Lehman Brothers."

If a deal was reached, it would be greeted positively by the market and the New Zealand dollar was likely to lose some momentum as investors regained faith in the greenback.

"There is so much talk about the New Zealand dollar being very strong, the reality is the US dollar has been very weak," Lim said.

The kiwi closed at US86.49c in weekend trading, having soared past US87c last week.

The tentative outlines of last night's accord include spending cuts of US$1 trillion ($1.14 trillion) and creation of a special committee to recommend additional savings of up to US$1.8 trillion.

The new panel would have to act before the Thanksgiving congressional recess in late November or government programmes including defence and Medicare would face automatic, across-the-board cuts, a source said.

The prospective agreement would not include increased net revenue, a sticking point for Republicans who have been adamant that any deal with tax increases could not pass the Republican-run House.

Democrats, including those who run the Senate, have been insistent that any deal must be a "balanced approach" that includes revenue, raising questions about whether President Barack Obama would find the support of his party for the plan.

Obama has been demanding an increase in the US$14.3 trillion debt limit that lasts through the 2012 election, when he is seeking another term.

Senate Majority Leader Harry Reid last night said he was "confident that reasonable people from both parties should be able to reach an agreement".

He cautioned that "there are many elements to be finalised".

To give the negotiations more breathing room, Reid pushed forward by 12 hours the test vote on measures to raise the trillion debt ceiling and cut government spending. The planned vote was rescheduled for 1pm on Sunday at the Capitol (5am today NZ time).

Earlier Mitch McConnell, the Senate Minority Leader, said he was "more optimistic" and that negotiators have "got a chance of getting there."

John Boehner of Ohio, the House Speaker, also voiced confidence an agreement could be reached.

US stocks fell at the weekend as the debt impasse continued.

The Standard & Poor's 500 Index slipped 0.7 per cent and tumbled 3.9 per cent for the week, its worst slide in a year.

ON THE TABLE

Tentative agreement reached last night between White House and congressional Republicans

* $1.1 trillion: in spending cuts

* $2 trillion: in additional savings

* $0: increase in tax revenues

- NZ HERALD, BLOOMBERG, AAP