WILL U.S. LEAVE THE “CLIFF”?
On the eve of 2013, the situation with the “ceiling” of U.S. public debt неумолимо растущего госдолга США is no better than in 3Q2011. Then the crisis was prevented by the Congress’ urgent resolution to raise the upper limit, which helped postpone the budget economy and shortage reduction efforts to the start of 2013. Barack Obama’s team is going to raise taxes and cut a portion of tax benefits in 2013.
If the Congress is unable to decide to take new fiscal policy control efforts, the U.S. economy is in for the so-called “fiscal cliff”, at the “bottom” of which the shortage will decrease so significantly that, according to the estimates of the Congress’ Budget Department, GDP will drop by 0.5%, unemployment will aggravate, and the short-term risk of a new recession round will increase. U.S. partial default threatens the global financial system as it destabilizes debt markets. The fact is that the AAA-rated Treasury bills are widely used by borrowers to secure debt.
On the other hand, if the Congress cancels the current budget control efforts and maintains virtually all tax breaks, it will enable the U.S. economy to grow by 1.7% in the following year, thus accelerating the public debt growth. The new developments, according to IMF, will result in U.S. dollar losing the reserve currency status and will aggravate the need for taking drastic budget deficiency cutting efforts, which would inevitably restrain further economic growth.
The pending disputes are compounded by the polarity of the U.S. political system, making a quick compromise on the future tax treatment impossible. Nowadays, judging by changes in the CDS price for the 5-year U.S. debt, no significant risk accumulation has occurred. It might seem that investors are still confident that the U.S.A. will avoid the “cliff” (see Fig. 1). However, during previous disputes on the debt “ceiling” (in 2011) and in the absence of the timely resolution, CDS appreciated by almost a third just in two weeks, due to uncertainty. As the fiscal shock anticipated in the forthcoming year is much more severe, protracting a debatable will incline economic agents to start changing its behavior in advance, even despite the Congress’ ability to cancel the economy efforts retroactively.
Judging by the situation that took shape in the U.S. economy and the degree of its impact on the entire global financial system, the Congress is most likely to opt for the alternative when the public debt “ceiling” is raised and the budget deficiency is slightly reduced. Cash injections, though pro-inflationary, into the weakened economy may be applied in the future, moreover that the debt is denominated in the U.S. own currency. However, any such resolution means just a postponement of the much sought-for drastic change in the fiscal policy.
Fig. 1. CDS price for the 5-year U.S. sovereign debt. Source: Bloomberg.
I.N. Nazarov,
Analyst, Financial Research Institute
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