LONDON – If ever there was a pivotal moment for financial markets, this could be it: The United States defaults and investors face the great unknown, or it doesn't and one of 2011's key risks is removed.
Not that the coming week does not hold other events of note. There are central bank rate decisions and a raft of significant economic reports, for example. The euro zone crisis is also rumbling on.
But far and away the most important issue for investors is Tuesday's deadline for Washington to raise its $14.3 trillion debt limit. To investors' dismay, approval is being held up by a bitter partisan squabble between Democrats and Republicans.
Without agreement the vaunted ``triple A''-rated U.S. economy could default by not paying all its bills, at least temporarily.
After weeks of failed negotiations, U.S. lawmakers were close to a last-gasp $3 trillion deal on Sunday to raise the U.S. borrowing limit and assure financial markets that the United States will avoid a potentially catastrophic default.
For markets, however, seeing is believing and investors are not likely to rest easy until a deal is firmly in place.
The government has said Aug. 2 is the deadline to raise the debt ceiling but this date is not necessarily inviolate. The U.S. Treasury could decide it was a priority to keep paying its debt obligations, avoiding any short-term default.
In theory, however, lack of agreement could prompt turmoil on financial markets, with investors selling U.S. debt, dumping other dollar-denominated assets, running away from global risk assets and scrambling into already overcrowded safe havens.
Gold , for example, has risen close to 10 percent in July alone, hitting a series of all-time nominal highs as investors have fled the twin U.S. and euro zone debt crises. Similarly, the Swiss franc has soared against both the dollar and the euro in the month.
``We are suggesting that there could well be some more volatility. But we are not inclined to believe that volatility will last long,'' said Kevin Gardiner, managing director of research and economics at BarclaysWealth.
He said there might even be some opportunities created if assets such as U.S. equities react negatively, making them cheaper.
A default, nonetheless, would raise huge questions about the supposed sanctity of the world's largest economy, triggering immense stress on U.S. money market funds, tempting banks to stop lending to each other as in the Lehman crisis, and potentially tipping the country back into recession.
If, on the other hand, negotiators in Washington succeed in raising the debt limit, an argument can be made that a relief rally of riskier assets would be in order.
Some of the pre-deadline positioning would almost certainly unwind, for example.
Investors clearly want to start raising their risk profiles. Reuters asset allocation polls released in the past week showed a moderate rise in equity exposure for the second month in a row.
At the same time, returns on mainstream assets this year, while poor, do not come close to reflecting the kind of news that has been thrown at them, from Japan's earthquake and tsunami to the euro zone crisis and turmoil in the Arab world.
What has been holding investors back most recently are the twin debt crises. If agreement is reached in Washington, that could combine with the Greek bailout agreed by the euro zone to lift some of the barriers.
``I think they are going to come up with something. There will be a certain amount of relief. There will be a bounce,'' said Christopher Potts, head of economics and strategy at brokers Cheuvreux.
But he said that for a longer-term return to the bull market, signs of diminishing inflation in emerging markets and better growth in the U.S. economy were needed.
The debt issues, indeed, are not going to be solved simply by an agreement in Washington and the euro zone's second rescue package for Athens.
``We are going to be living with this for years,'' Potts said.
The United States, for example, remains under threat of a credit rating downgrade whether it agrees on the debt ceiling or not, raising fundamental issues about what institutions can hold U.S. Treasuries.
Attempts by euro zone leaders to draw a line under the bloc's debt crisis and avoid contagion, meanwhile, already appear to be stumbling.
Spain added to investor nerves by calling an early general election for November.
All this should be enough to keep investors busy at a time when, traditionally, many of them are supposed to be away on summer holidays.
That they are not can be seen from volume on the FTSEurofirst 300 stock index, which is higher than it was in non-holiday season April and May.
But there are also plenty of other, more traditional investment triggers in the coming week to focus the mind.
The European Central Bank's rate-setting meeting Thursday looms large as one. The bank has embarked on a tightening cycle but is not expected to raise rates this time.
Or at least it wasn't until Bank of France chief Christian Noyer said in the past week that the ECB was exercising ``grande vigilance'' on inflation - which if translated as ``strong vigilance'' would mean the bank was preparing a rate rise.
The Bank of France sought to clarify, saying Noyer meant ``strong alertness,'' a phrase with a lot less resonance. But it was enough to make the meeting less routine than it might have been.
Investors will also be looking for the latest takes on how the U.S. and euro zone economies are faring -- ultimately more important than the debt issues.
U.S. and euro zone manufacturing surveys are due out as is the always closely watched U.S. jobs report, a key gauge that filters down into consumer spending.