- Title: USA/GREECE: Republican and Democrat negotiators at the brink of U.S. default
- Date: 8th July 2011
- Summary: NEW YORK, NEW YORK, UNITED STATES (JULY 25, 2011) (REUTERS) (SOUNDBITE) (English) STAN STOVALL, CHIEF MARKET STRATEGIST AT STANDARD & POOR'S, SAYING: "The consequences would be very widespread. And the real problem is that you really don't know the repercussions of it all. It is like living in a small town, you kick one person and then seven people jump. You are not really sure how many bonds, how many countries, how many states, how many individuals will be affected. But certainly, Treasuries would be affected, GSE's -- the government sponsored entities like Freddie Mac, and Fannie Mae -- would be affected. Certainly, a lot of the consumer and business loans, since they are tied to the ten year note, would be affected."
- Embargoed: 23rd July 2011 13:00
- Keywords:
- Location: Usa, Usa
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- Country: USA
- Topics: Economy,Politics
- Reuters ID: LVA79WHTH8SIBA9AGJPHPQF0QKZH
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- Story Text: Here is the bottom line: the United States of America is at serious risk of stumbling into fiscal default within a very few days unless politicans in the nation's capital agree on how to avoid what most economists say would amount to an economic calamity. So far, the politicians have seemed unwilling to do so and the prospect for a unexpected burst of magnanimous diplomacy is unlikely.
The United States government owes $14.3 trillion, or approximately $46,000 for every man, woman, and child in America. Most of that debt is money that the government owes to itself -- essentially an internal accounting issue. But a large chunk of the debt is in the hands of foreign governments, pension funds, commerical banks, mutual funds, state and local governments, and individual investors. China alone has an eight percent slice of the debt pie.
At the same time, the U.S. spends more much money than it receives in tax revenue and other payments. In order to keep its operations running, the U.S. government borrows money and, in doing so, accrues more and more debt. The authority to accrue new debt is given by the U.S. Congress -- but capped at a certain ceiling on borrowing.
In past years, Congress has routinely raised the debt ceiling whenever the previous authorization was due to expire. This year, however, the routine business of raising the debt limit has erupted into a political standoff from which few politicians seem willing to back down.
The debt ceiling authorization expires on August 2. Most politicians in Washington agree that the government ought to continue operating smoothly and most agree that the government ought to continue to pay its debts.
Further, most agree that in order to balance the government's spending with its anticipated income -- and, perhaps, pay off some of that debt -- there must be a major reassessment of the where the government spends its money and where it expectes to receive new revenue.
With ever increasing rancor, Republicans and Democrats in the U.S. Congress have been haggling with the U.S. President Barack Obama's White House for the better part of two months over this question, and they have less than a week to reach agreement.
On August 2, the U.S. government will no longer have the legal authority to borrow more money to pay off its existing debt and to keep government operations afloat. The United States will essentially be in default and the world's financial markets are not expected to react sympathically.
"Markets right now are getting more and more nervous because they believe that the unthinkable is something that could actually occur. Nobody believed about a month ago that the Congress would actually let the debt ceiling debate get this far and, in fact, it has," said Stan Stovall, the chief market strategist at Standard & Poor's rating agency.
Obama's Democrats and their Republican rivals, led by House of Representatives Speaker John Boehner, have pursued separate budget proposals which have been short on compromise. Both sides in the negotiations have expended much energy on political posturing, and no one in the negotiating room seems unaware that the next U.S. presidential election campaign is already underway.
The Democrats are reluctant to slash spending in the most voracious entitlement programs -- the Medicare and Medicaid health programs and in the Social Security retirement fund.
Instead, Obama has pressed for a combination of spending cuts and increased taxes. He says a deal that relies solely on spending cuts would put a burden on the people least able to afford it.
"It essentially asks nothing of corporate jet owners. It asks nothing of oil and gas companies and it asks nothing of folks like me who have done extraordinarily well and can afford to do do a bit more. In other words if you don't have revenues the entire thing rests on the back of the poor and middle class families," Obama said.
Republicans, driven by the fiscally conservative Tea Party movement that helped them win control of the House of Representatives last November, have been loathe to raise new revenue by increasing taxes.
Even if Boehner were to reach agreement with Obama and the Democrats, it is not certain that the rank-and-file Republicans in the Tea Party movement will sign off on any concession toward Obama. The Tea Party caucus sees political advantage in dragging the process out, which, to their mind, weakens Obama.
"There are a lot of Tea Party minded members in Congress now and they are holding hard. They are not forgetting where they came from. They are not forgetting their constituients -- why they were elected -- and that, I think, is why you are seeing the internal Republican battle with the debt limit," said Kellen Guida, a Tea Party leader.
Regardless of the politics, players in the financial markets have warned that the stagnant pace of negotiation risks a downgrade of the United States' gold-plated AAA credit rating. And if the politicians fail to reach agreement by August 2, the economic fallout will reverberate throughout the global economy.
"The consequences would be very widespread. And the real problem is that you really don't know the repercussions of it all ... You are not really sure how many bonds, how many countries, how many states, how many individuals will be affected," Stoval said.
Critics say said both sides in the negotiations appear more interested in scoring political ahead of the presidential campaign, rather than forging a political compromise that is critical to the nation's fiscal stability and reputation. And while few observers predict a Greece-like financial collapse if the August 2 deadline is not met, the economic fallout in the U.S. of increased interest rates and a shattered economic reputation will be felt long and hard. - Copyright Holder: REUTERS
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