Even without a US default, there's lots to worry about

For all the fear worldwide over the US debt ceiling standoff, the odds of a default are small. Also, the global savings glut and oil exporters will bolster the greenback

If you're looking for something to worry about this August, you really are spoilt for choice.

Top of the fear list has to be concerns over what could happen if the fractious politicians in Washington fail to agree on an extension of the United States government's US$14.3 trillion debt ceiling by the US Treasury's deadline on Tuesday.

Just a few weeks ago, most observers were confidently predicting a deal would be struck well before then. The alternative was just too awful to contemplate.

But now it looks increasingly likely that the wrangling will continue all the way up to, and very probably beyond, next week's deadline. Suddenly there seems a real chance that the US government could find itself embarrassingly short of ready cash.

As a result, the media are full of anguished stories about the financial chaos that would follow a default by the world's largest debtor. Commentators predict a plunge in the US dollar, a sharp rise in bond yields, panic in the money markets, slumping stock prices and a rush to hoard cash that would see bank lending - and business activity - dry up. If you believe the reports, it would be the collapse of Lehman Brothers all over again, only worse.

Chinese officials, holders of around US$1.4 trillion in US Treasury securities and another US$200 billion or so of US agency debt, are "appalled" at the impasse, according to Morgan Stanley Asia chairman Stephen Roach. No doubt Hong Kong's government, with over US$120 billion in Treasury bonds of its own, is feeling uneasy too.

But in reality the chance that the US will default on its Treasury debt is small. If Congress does fail to extend the debt ceiling by Tuesday, it could well lead to a partial shut-down of government spending. But interest payments on treasury bills and notes would be the last disbursements to be curtailed. Indeed, under the 14th amendment of the US Constitution, the government is legally obliged to honour its debts.

Of course, even if the bickering parties in Washington do manage to cobble together a deal, it is still likely that the US will be stripped of its AAA sovereign debt rating.

But how much a downgrade will matter to financial markets is questionable. After all, Japan's sovereign rating is a lowly AA-, yet that has neither hindered the Japanese government's ability to borrow, nor undermined the strength of the yen.

And for the world's surplus economies, the US will still be the borrower of last resort. As Bill Belchere, chief global economist at Mirae Asset Securities in Hong Kong, explains: "The world will still have a savings glut, and those savings will still have to go somewhere."

In other words, with their foreign currency surpluses to manage, China and the Middle East's oil exporters will have little option but to continue buying US dollar debt, supporting the currency and keeping bond yields low.

Still, even if we can relax a little about the threat of a US default there are plenty of other dangers for the inveterate worrier to fret about.

Even after the latest rescue package for Greece, there is still the danger that the euro zone's crisis could flare up again.

That could prove painful for Hong Kong. According to Credit Suisse, euro-zone banks account for 14 per cent of Hong Kong's domestic lending, while private investors from the city own Greek, Portuguese, Irish, Italian and Spanish debt worth 2.2 per cent of Hong Kong's gross domestic product.

In the longer term, there is a risk that the financial turmoil in the developed world could have a knock-on effect on US and European demand for exports from Asia.

Again, that would hit Hong Kong hard. Taken together, the goods the city ships each year to the US and the euro zone are worth 35 per cent of Hong Kong's GDP.

Meanwhile, there is still a whole host of regional concerns, with some economists saying that Asian countries risk a slowdown in growth after overtightening their monetary policy settings, while others continue to warn that inflation is in danger of running out of control.

There are persistent fears about a hard landing for the Chinese economy, possibly induced by a surge in bad loan levels at the mainland's banks. And finally, closer to home there is always the worry that the Hong Kong property market is a bubble that's in imminent danger of bursting.

With so much to be anxious about this August, perhaps it would be a better idea simply to take off on holiday for the next month and hope the skies have cleared by the time you get back in September.

tom.holland@scmp.com