Greece finally found sense this week and avoided committing financial suicide, for the time being at least.

In fact Greece's patliment overnight voted again to implement the 28 billion euro austerity package that will be far tougher on the countrey than anything the US is contemplating (assuming Greece fully complies, of course).

[Sign up to get reports daily in your inbox]

Will America prove to be as sensible, or are the fools and idiots really in charge among the Republicans determined to cause any amount of damage in their blind opposition to President Obama and commonsense?

Greece isn't out of the woods yet, there are more milestones for it to reach and pass in the next few months, let alone the next five years, but a start has been made.

At best Greece has bought itself more time to go broke slowly and without a sudden crash, at worst, there will be an almighty collapse, but at least we all know it's still possible.

In the US, no one has much of an idea what happens from August 2 if the current debt ceiling limit isn't lifted from the present maximum of $US14.3 trillion.

This week, Standard & Poor's attempted to put politicians, the markets and analysts of all kinds straight on what would happen, from its point of view. For the US (and Republicans and others) it's not nice.

Such a failure would see the Standard & Poor's ratings group cut the US rating to what's called "selective default", a move that would make the volatility we've seen over Greece in recent days, look like a noisy night at a friendly taverna.

The Reuters story detailing this was the first real indication from a major ratings group about what they would do in the event of a failure to lift the country's debt ceiling, which would allow the US Treasury to redeem debt and make any interest payments due on August 4.

It makes a mockery of those in the US who argue that a failure to pay interest and redeem debt after August 2 would only be a "technical default".

S&P's managing director John Chambers (who is also head of the firm's sovereign ratings committee) told Reuters that US Treasury bills maturing on August 4 would be rated 'D' if the government fails to honor them. Unaffected Treasuries would be downgraded as well, but not as sharply.

"If the U.S. government misses a payment, it goes to D," Mr Chambers said. "That would happen right after August 4, when the bills mature, because they don't have a grace period."

While Standard & Poor's isn't the first credit rater to issue a warning on this issue - rival Moody's said on June 2 that it would downgrade the US shortly after a possible ceiling-related default, no other group has warned of such a deep ratings cut.

S&P is so far the only credit rater to have put the America's AAA rating on a negative outlook basis: Moody's and Fitch have it on a stable footing, which is looking increasingly tenuous.

America’s borrowing limit of $US14,300 billion will be reached on August 2. If it is not lifted, the US will not be able to pay overseas creditors, nor will it be able to send out Social Security cheques.

On August 4, the Treasury Department is due to pay off $US30 billion in maturing short-term debt.

A 'D' rating means default, pure and simple. It would send financial markets reeling because there would have to be a host of selling of US bonds of all kinds and durations. Trillions of dollars are held in complicated financial deals in the US, are held in the foreign reserves of countries like China, Japan and the UK ???. The potential losses would be huge, the loss to American pride and prestige would be dramatic and the greenback's status as the world's reserve currency would be undermined.

Click here to find out more!

And it's not just S&P. The International Monetary Fund weighed in with its own warning in its annual report on the US economy overnight saying there could be a “severe shock” and other damage to global financial markets if the US does not move quickly to increase its borrowing authority.

"These could take the form of a sudden increase in interest rates and/or a sovereign downgrade if an agreement on consolidation does not materialize or the debt ceiling is not raised soon enough.

"These risks would also have significant global repercussions, given the central role of U.S. Treasury bonds in world financial markets," the IMF said.

And the IMF warned that in the event of an agreement on spending cuts happens between Obama's Administration and the Republicans, a too big a reduction in government spending could, if it happens quickly "also significantly weaken domestic demand".

Fears of a "technical default" by the US have been rising after budget negotiations between Democrats and Republicans fell apart in Washington earlier this week.

US commentators say agreement in the current climate would be fairly easy but for the fact that the US lower house, the House of Representatives, is controlled not only by the Republicans with a huge seat majority, but by Republicans who are Tea Party sympathisers and highly resistant to tax increases (which Obama wants).

Some of the Tea Party people have even suggested that a "technical default" would not be such a big deal.

A further complication is that some of the emerging Republican contenders for the party's nomination as Obama's opponent in the 2012 President campaign, are Tea Party darlings, such as Michelle Bachmann and (if she stands) Sarah Palin.

All this would make an agreement that could be voted on and agreed to before August 2 problematic.

With the debt talks in hiatus, new ideas are surfacing such as prioritising debt payments. But US Treasury Secretary Timothy Geithner said overnight that wouldn't change a thing and would still cause investors to shun US Treasury securities.

He said that because the US now borrows roughly 40 cents of every dollar it spends, prioritising payments with no debt limit increase would require cutting 40% of all government expenditures as quickly as possible, from Defence onwards.

Reuters said Mr Chambers insisted that the likelihood of a US default was extremely low, "as the firm expects a last-minute increase to the country's debt ceiling just like it has happened for more than 70 times since the 1960s. But given the make up of the US House of Representatives that could be wishful thinking.

He emphasised that a default on US Treasuries -- the major global benchmark against which all other debt is measured -- would dwarf any worries about America's actual credit rating because global markets would crumble.

If that happens, there's every likelihood that the Reserve Bank here might have to play lender of last resort for a second time in three years to our banks.

A US default could see global financial markets freeze overnight because many of the big banks would have securities on their balance sheet that no longer had any value.

That would raise questions as to the solvency of those banks, whose ability to maintain liquidity by selling US Treasuries, would be severely restricted.

They would cut lending and start recalling loans to protect their balance sheets and remain solvent and liquid.

A quick passing of the ceiling after the default being declared, would help settle the situation, but the dislocation could be enormous, especially in the huge US overnight money markets where US Treasury securities are used heavily as collateral by banks borrowing from each other and from the Fed.

More from IBT Markets:
Follow us on Facebook.
Follow us on Twitter.
Subscribe to get this delivered to your inbox daily