Markets rally as Obama avoids collision with the debt ceiling

Stockmarkets around the world let out a sigh of relief this morning as president Obama announced a deal on the US deficit.

by Andrew Saunders
Last Updated: 06 Nov 2012
Indexes in Asia and across Europe rose on the news that the US government will be able to continue to borrow to pay its bills, with Hong Kong, London, Paris and Frankurt all up over 1% in early trading. And the gold price softened slightly to a ‘mere’ $1,617 an ounce.

Just in the nick of time - the deadline for raising the debt ceiling is tomorrow and the prospect of a US technical default (unlikely) or the loss of its coveted AAA credit rating (more plausible) has been casting a seriously gloomy pall on shareprices for the past few weeks,

But can the problem really be solved that easily, or is there more to come? The deal, sweated out over the weekend in what amounts to a very high stakes game of chicken between Republicans and Democrats, means that up to $2.8tn (yes, trillion) will be slashed from US government spending over the next decade, in an effort to reduce a deficit which currently stands at a staggering $14.3tn. In return for which the Obama administration will be allowed to continue to raise borrowing (and thus pay its bills) until 2013.

Savings totalling $1tn have already been identified (those Tea Party types clearly having found time to fit some serious economics into their packed bowling and elk-shooting schedules), but the rest will have to be found by a special congressional committee to be formed in the Autumn. $1.8tn is an awful lot to have to find down the back of the sofa, but Obama has pledged that the savings will not be ‘a drag on a fragile economy’. Judging by our own experience of similar sentiments expressed on this side of the pond a year or two ago, he may find those words pretty challenging to live up to.   

But perhaps not as challenging as another debate on the deficit in election year (2012) would have been, which is what the Republicans were after and which would have been electoral dynamite. So Obama clearly thinks that while the price of this deal is high, it’s worth paying all the same. That’s politics.

In return for the pledge on savings, Obama will be able to raise the debt ceiling by $2.4tn in two stages by 2013, but will be allowed no tax rises to accompany the spending cuts.

So, another shabby political compromise hammered out, job done and move on? Not so fast. For one thing, the deal has yet t receive congressional approval, by no means a done deal in these days of highly polarised US politics. And for another, as the mathematically gifted amongst you may have realised, the result of all the hoo-hah is a net saving of $400bn over a decade, which isn’t going to make much of a dent in that $14.3tr deficit, is it? And that’s a best-case scenario, assuming both that all the planned savings get made, and that borrowing doesn’t rise again after 2013. Hmm.

So the immediate crisis may have been averted, but it’s racing certainty that the debt crisis is going to run and run, not only in America but all over the developed world. Happy Monday!

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