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Monday, May 16, 2011

Middle East: Debt and budget fight in US

ALARAB Online

Debt-laden US government credit card to hit limit

The debt-laden US government's credit card will hit its limit Monday, creating a cash crunch that puts the country's credit standing at risk as politicians battle over its long-term deficit.

US President Barack Obama warned if no deal is brokered on raising the $14.29 trillion debt ceiling set by Congress then the United States risked plunging back into recession.

"If investors around the world thought that the full faith and credit of the United States was not being backed up, if they thought that we might renege on our IOUs, it could unravel the entire financial system," Obama warned at a CBS town hall meeting broadcast on Sunday.

"We could have a worse recession than we already had. A worse financial crisis than we already had."

Reaching the debt ceiling will not have an immediate impact on government finances, because the Treasury has found about 10 weeks of wiggle-room in short-term adjustments and an unexpected April jump in tax revenues.

But with Republicans refusing to increase the ceiling without massive future spending cuts, the longer the fight over bridging the country's deficit goes on, the higher the stakes will get.

If nothing is done by about August 2, there is a chance the United States, which has always merited a top-grade credit rating, could do the unthinkable -- default on its debt payments.

Few think it will get that far, as the White House leads behind-the-scenes talks on a grand strategy on the deficit.

Republican Speaker John Boehner said Sunday he was ready to cut a deal over raising the US debt ceiling, but he has called for trillions, rather than billions, in spending cuts.

He told CBS's "Face The Nation" program he believed it would be necessary to raise the debt ceiling, but said it must be done in a way "that addresses America's long-term fiscal challenges."

"I'm ready to cut the deal today. You know, we don't have to wait until the 11th hour," he said, before adding: "I am committed to making sure that we have real reductions in spending and real changes to the budget process so this problem will never occur again."

Some liken the fight to a game of chicken being played with the country's credit standing at stake.

"Using the debt limit as a bargaining chip is quite risky," Ben Bernanke, the chairman of the US Federal Reserve, warned politicians last week.

"At minimum the cost will be an increase in interest rates that will actually worsen our deficit," he said.

"The worst outcome would be one in which the financial system was again destabilized... which of course would have extremely dire consequences for the US economy."

Bond analysts -- who are closest to those who fund the debt -- called a default unthinkable.

"The severity of the outcome is why people are not believing that it will happen," said Aaron Kohli, a US Treasuries specialist at Nomura Securities. "It's the financial equivalent of a nuke going off."

The numbers are worrying. As of Thursday, the government had another $38 billion to borrow before striking the ceiling, and the settlement of bonds auctioned during the week would take it there on Monday.

Meanwhile, the government has to bridge a monthly funding deficit of $120 billion.

The ceiling has been raised or lowered 74 times in the last 50 years, usually without political acrimony. But Republicans have drawn a line in the sand over the issue this time.

Pressure on the deficit has mounted from others as well.

On April 18 Standard & Poor's cut the outlook on US sovereign debt to "negative," the first time the ratings agency has ever placed such a warning on the US's gold-standard AAA rating.

S&P said it did not see Washington agreeing on a plan for its debt before the November 2012 presidential election.

The International Monetary Fund has urged the country to "urgently" address its problems, casting doubt on its resolve.

But bond markets -- usually the first sign of concern over a country's financial health -- have actually moved in the other direction, with yields on US debt falling last week, mainly as money moved out of falling commodities and stocks.

"I don't think much will happen. They can continue to operate through August" while talks continue, said S&P's chief economist, David Wyss.

"There's obviously no danger of debt default" before then, and after August 2, the government would prefer to cut spending rather than default.

"They will prioritize debt service payments," he said.

-Agencies-

http://www.alarabonline.org/english/display.asp?fname=\2011\05\05-15\zbusinessz\942.htm&dismode=x&ts=15-5-2011%2016:56:38

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