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Danger of more damaging `fiscal cliff` lurking in Washington

Danger of more damaging `fiscal cliff` lurking in Washington

Posted January. 16, 2013 15:09,   


Wall Street and global financial markets are edgy over another U.S. fiscal crisis that could erupt a month later.

In August 2011, the country`s sovereign rating suffered a downgrade over the possibility of default due to deadlocked negotiations over the debt ceiling. The same thing is happening again in 18 months. Experts warn that if the talks fail, strong repercussions incomparable to the aftermath of the fiscal cliff are expected.

U.S. President Barack Obama said in the final news conference of his first term at the White House on Tuesday, “The credit of the United States of America is not a bargaining chip. The Congress should unconditionally increase the legal limit on the government’s authority to borrow money to pay its bills.” He spent more than half of the hour-long conference on national debt issues, saying, “You don’t go out to dinner and then eat all you want and then leave without paying the check.” The president also blasted the Republican Party with strong words such as “gamble” and “ransom.”

In response, Speaker of the House John A. Boehner (Republican-Ohio) said, “The consequences of allowing our spending problem to go unresolved are real, too. The House will do its job and pass responsible legislation that controls spending.” According to Politico on Monday, more than half of Republican members are prepared to allow a default unless the president agrees to dramatic cuts that he has repeatedly opposed.

Brian Gardner, vice president of the investment bank Keefe, Bruyette & Woods, said, “Wall Street is cynical about Washington politics.”

Moody’s and Fitch, which did not downgrade the U.S. sovereign rating in August 2011 as Standard & Poor’s did but just the outlook to "negative," warned that they could downgrade the rating for September and December last year, respectively, if the negotiations fail. Fitch said in its latest report, “The last-minute showdown will significantly undermine the credibility of the payment ability of the U.S. government.”

Alan Blinder, former vice chairman of the Federal Reserve and now an economics professor at Princeton University, said in a contribution to the Wall Street Journal, “At current rates of spending and taxation, federal receipts cover less than 74 percent of federal outlays. So if the government hits the debt ceiling at full speed, total outlays will have to be trimmed by more than 26 percent immediately. That amounts to more than 6 percent of GDP, far more than the fiscal cliff (4 percent) we just avoided.” He added that another fiscal cliff will almost certainly result in a second rating downgrade and bring the most repercussions.

The U.S. in the middle of next month is highly likely to hit its debt ceiling, which was extended by a special action by the Treasury Department at the end of last year. If the U.S. Congress fails to agree on raising the ceiling, the payment of wages for government employees, Social Security benefits, and construction costs will be postponed, and the government will default on Treasury bonds for failing to paying interest to bondholders.