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The failure to agree on a debt ceiling could have nasty repercussions for the U.S. dollar.

Billionaire investor Warren Buffett calls it a silly game of Russian roulette. Former Federal Reserve chairman Alan Greenspan regards it as an "extraordinarily dangerous problem" and The Economist labels it "the mother of all tail risks."

It is the continuing political impasse between Republicans and Democrats over what used to be an automatic ritual: raising the statutory annual debt ceiling so the U.S. Treasury can meet the federal government's ever-expanding financial obligations. Both parties have tied the immediate problem to broader deficit reduction differences related to taxes and spending cuts.

With the deadline drawing near and market concerns mounting, President Barack Obama called congressional leaders to the White House Thursday. Later he pronounced the meeting "constructive," but acknowledged that the two sides remain far from an agreement. Further talks are scheduled Sunday.

Meanwhile, officials at the Treasury, where Secretary Timothy Geithner has set Aug. 2 as the date when his department runs out of financing options, have started preparing for the worst. According to a Reuters report, a small Treasury team has secretly been examining options to avoid a financial calamity despite protestations that they have no contingency plans if the deadline passes with no debt deal. Options under study, according to Reuters, include delaying or prioritizing payments, and even whether Mr. Obama can use the Constitution to bypass Congress.

Most analysts and political players predict the two sides will still reach a compromise in time - if only because the consequences of failing to do so range from damaging to potentially catastrophic for the financial markets, the U.S. and global economies and Washington's cherished reputation as the safest of havens for investors in turbulent times.

Tying the ceiling to complex negotiations on the deficit is "just silly to do," Mr. Buffett told CNBC Thursday, noting that Congress raised the debt ceiling seven times during the George W. Bush administration. But now, "they're using it as a hostage and you really don't have any business playing Russian roulette to get your way in some other matter. We should be more grownup than that."

Mr. Greenspan said last week that he doesn't expect Republicans and Democrats to reach a deal by the deadline, and he raised the spectre of a default that would cause the U.S. to lose its status as a "saver of last resort."

If saner heads don't prevail, and the game of brinksmanship in Washington carries the government over the brink, there would be no immediate crisis. But the longer-term repercussions could roil economies and markets around the world for years.

Failure to raise the debt limit right away would not leave the Treasury with empty pockets and no capacity to meet key obligations. Existing tax revenues cover more than half the government's expenses of about $3.8-trillion, including its most pressing obligations - from interest on the debt to social security, Medicare and military expenditures.

"The United States does not have to default on its debt, and the social security and Medicare cheques can go out even if Republicans and President Obama cannot strike a deal," Peter Morici, a University of Maryland business professor, said in a commentary. As long as the government honours the interest on the debt, it can issue new bonds to replace those that come due "without piercing the statutory debt limit."

The Federal Reserve can also tap into its hoard of about $2.6-trillion worth of Treasury bonds and other securities on its balance sheet to absorb the money the Treasury has to print to pay its bills, Mr. Morici suggested.

And the Treasury itself still holds about $100-billion worth of mortgage-backed securities from Fannie Mae and Freddie Mac, as well as close to $400-billion in gold that it could sell or swap with the Federal Reserve, to raise emergency cash "if all other options were exhausted," Goldman Sachs economist Alec Phillips noted in a report. But "since taking these measures would simply delay the inevitable debt limit increase, we do not expect either to occur."

The government is not about to default on any interest payments, which makes the whole debate on the issue "a bit of a red herring," agreed U.S. economist and investment strategist Ed Yardeni of Yardeni Research Inc.

The government actually bumped up against the $14.3-trillion (U.S.) debt ceiling on May 16. Mr. Geithner imposed temporary measures, such as cancelling new debt issues to finance pensions, to keep more crucial outlays flowing. But he warned that he would be out of alternatives by Aug. 2 and that the U.S. would be at risk of its first-ever default if Congress failed to approve more borrowing capacity.

"They've been obviously playing political chicken by implying that the Treasury would be forced to default on its debts," Mr. Yardeni said. "I would imagine that the last payment that they would hold off on would be making interest payments on the debt. It would be criminally insane for them not to do that."

The politicians also are unlikely to have any stomach for the economic fallout that is sure to result from any interruption in social security, unemployment or other federal payments or a severe cutback in services.

In the short term, failure to raise the debt ceiling would not trigger a major crisis. But in the longer term, any kind of U.S. default would create a crisis of confidence among investors, not only in the U.S. but in other markets lacking the depth and breadth of the world's biggest capital market. As that crisis infected other markets, the cost of borrowing would soar for governments and corporations, and economies would sputter.

WORST-CASE SCENARIO

1. Congress doesn't raise the $14.3-trillion debt ceiling by Aug. 2.

2. U.S. Treasury is unable to make a $30-billion debt payment due on Aug. 4.

3. The U.S. credit rating is cut, and investors demand higher interest rates to hold U.S. debt.

4. The government is forced to pay billions more to borrow money.

5. Government spending is reduced, slowing the economy.

6. Consumers and businesses, forced to pay higher interest rates to borrow money, cut back.

7. Foreign investors flee U.S. securities, the dollar devalues, and inflation soars.

8. Stocks plunge amid a widespread loss of confidence.

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