Washington truce stretches out debt crisis, leaves economy in limbo
Analysts describe festering political conflict as "a Sword of Damocles", with politicians facing three more showdowns until March
4:38PM BST 17 Oct 2013
Washington’s eleventh hour debt deal has averted an immediate crunch for US and the world, but the crisis now threatens to drag on through three successive deadlines until March.
“It is a truce, not a peace,” said Stephen Lewis from Monument Securities. The US government will run out of funds by January 15th. The new debt ceiling will expire by February 7, at which point $200bn of special tricks may keep the US Treasury afloat until March.
The festering political conflict will hang over America and the world like a Sword of Damocles. “The reprieve will be short. The stage is set for another showdown,” said Paul Edelstein from IHS Global Insight.
The Republican climb-down on Capitol Hill ends the two-week government shutdown, but damage has already been done. Consumer confidence has suffered the worst slump since the Lehman crash in 2008. Investment has been delayed. Issuance of oil and licences has been frozen, and export finance held up.
Standard & Poor’s said the shutdown has shaved 0.6pc off fourth-quarter growth. The country will now remain in limbo for another four months, with no solution in sight to the ideological war over the size and role of the US government.
The great unknown is whether Republican `Tea Party’ radicals will tone down demands in light of polls showing that most voters blame the debacle, but the polarised geography of US party politics has hardened feelings on both sides.
Republican Senator John McCain accused his own party of a blunder in trying to force President Barack Obama to roll back health care reform by holding US debt to ransom, calling it “one of the most shameful chapters” of his Senate career. The Republicans may now fight on stronger ground, targeting the long-term solvency of US Social Security and Medicare.
John Chambers from S&P’s said the debt saga had been a disgrace, far below AAA standards. “This is unheard of in a cohesive civil society. It is simply not a characteristic of the most highly rated sovereigns that you have to worry about them not paying their debts,” he said.
World Bank chief Jim Yong Kim said the global economy had for now “dodged a potential catastrophe”. While few thought the US would default on its $16.7 trillion debt, a failure to meet this week’s cut-off could have led to a “selective default”.
More likely, it would have forced the White House to slash spending, inflicting a violent fiscal shock on the US economy. This danger still looms, putting the US Federal Reserve in an impossible position as it decides whether to wind down monetary stimulus this year, or delay yet again and risk stoking further asset bubbles.
Weeks of skirmishing have tarnished the US brand. Top Chinese economists have urged Beijing to cut its estimated $1.3 trillion of US debt, switching to equities and hard assets. Similar protests have been heard across the emerging market bloc, now holders of $9 trillion in reserves.
“China is already exasperated that the US is not listening to those who lend it money, and this latest brinkmanship may be the straw that breaks the camel’s back,” said Simon Derrick from BNY Mellon. “We think there will be a slow and steady retreat from the dollar, and less demand for US Treasuries."
France’s Charles de Gaulle famously complained that America enjoyed an “exorbitant privilege”, able to exploit its hegemonic currency to borrow cheaply. Dollars bears say Congress is testing this privilege to breaking point.
