America's shaky financial position got markedly worse yesterday when the slide
in the value of the dollar accelerated and a political row left the government
in danger of defaulting on its debt. Republicans in the House of Representatives
are refusing to back an increase in US debt levels in the latest dispute with
the White House over economic policy.
The government needs another $450 billion (£300 billion) to meet immediate bills but is facing opposition from politicians alarmed at a predicted budget deficit of $150 billion this year.
US Treasury Secretary Paul O'Neill warned: "If they don't act we are going to hit the wall, probably by next weekend because on Sunday we've got to certify social security payments and other large payments."
A $1.3 trillion tax cut, a declining economy and massive costs from the war on terrorism have left the US short of cash. It will dip into its social security surplus to balance the budget.
Another bad day on Wall Street was aggravated by further falls for the dollar, as foreign investors grow increasingly pessimistic about the prospects for the world's biggest economy.
The euro traded at more than 98 cents for the first time since February 2000, up from 87 cents since April, while sterling rose to a 22-month high of $1.5084. Analysts at Citibank now expect the euro to reach $1.02 in the next three months.
An attempt by Japan to weaken the yen by buying dollars had only limited success. It sold around $4 billion of yen, yet the Japanese currency soon recovered to 121.21 per dollar.
The Dow Jones fell more than 100 points in morning trading in New York and was down 56 points at 9197 by early afternoon. Nasdaq, the technology market, briefly fell below its worst level since the September 11 attacks, down 8 points at 1422.
Bleak profits, corporate scandals and terrorism fears have left investors reluctant to buy shares, causing the biggest half-year losses since 1970. Minor rallies are repeatedly followed by an immediate selling spree. A downgrade from UBS Warburg for technology giants Lucent and Nortel also rocked sentiment. Goldman Sachs lowered earnings estimates for IBM.
Analysts assume the Bush administration is involved in a game of brinkmanship with political opponents, who are thought certain to approve new borrowing later this week.
However, the government has already been forced into cancelling its usual weekly sale of Treasury bills, the equivalent of gilts, while it awaits permission to raise new money. The slightest government default on debt would have a dramatic effect on the stability of stock markets.
Mr O'Neill has faced fierce criticism for his handling of the economy and for "loose cannon" comments when he seemed to question whether a strong dollar was best for the US. His enemies could use his urgent need for funds to inflict further damage on his reputation.
Figures this week on consumer confidence and factory orders are eagerly awaited for signs of a recovery. Consumer spending, two thirds of the economy, is likely to have faltered.
Alan Greenspan, chairman of the US Federal Reserve, will make a decision on interest rates tomorrow. He is expected to leave them unchanged.