THE CLOCK IS TICKING

US lawmakers close to last-minute debt deal





Washington: US lawmakers were close to a last-gasp $3 trillion deal on Sunday to raise the US borrowing limit and assure jittery financial markets that the United States will avoid a potentially catastrophic default.
The possibility of an agreement raised hopes that a weeks-long partisan brawl over cutting the US deficit might be staggering to a cliffhanger close. There are just two days left to lift the debt ceiling, which caps how much money the United States can borrow to pay its bills.
“We’re really, really close to an agreement,” said Mitch McConnell, the Senate Republican leader who is playing a key role in the negotiations on a plan to reduce the deficit and permit a vote to raise the debt ceiling.
Democrats were more cautious of the deal that Republicans said would cut deficits by up to $3 trillion over a decade. It would force Democrats to stomach deep spending cuts without the tax increases they wanted.
“We’re not there yet,” SenatemMajority Leader Harry Reid said. With a bipartisan deal close, a vote failed in the Senate on a Democratic alternative plan pushed by Reid. The defeat of the plan was yet another procedural step to clear the way for a deal that could attract support from both parties.

David Plouffe, a senior adviser to President Barack Obama, said there was general agreement on a bipartisan plan that would cut the US deficit over 10 years in two stages: roughly $1 trillion up front and the rest based on the recommendation of a joint bipartisan committee.

The proposed $3 trillion in savings may calm financial markets but it appears insufficient to avoid a downgrade of America’s top-notch AAA rating by Standard & Poor’s. The agency last week reiterated that $4 trillion in deficit-reduction measures would be “a good downpayment” to show that Washington was putting the country's finances in order.

“It’s really unclear whether a downgrade will be avoided as a result of this deal,” said Kathy Lien, director of currency research at GFT, New York.
British and Japanese officials warned of disastrous consequences for the global economy if the last-ditch talks among lawmakers in Washington failed to agree on raising the US borrowing limit and averting a debt default.
Governments across the world fear that because of the key role of the US dollar in global banking and trading systems, there could be severe instability when Asian financial markets reopen on Monday if a US debt deal is not in sight by then.

Even if the two sides reach a deal, it still has a long way to go. Backers of a deal will have to tread a careful path in both the Democratic-led Senate and the Republican-held House of Representatives to get sufficient support for passage.
House Speaker John Boehner, the top US Republican, told House Republicans in an email the talks were moving in the right direction “but serious issues remain”. Boehner faces pressure to placate conservative Tea party movement-aligned lawmakers in his caucus.

The emerging deal includes atwo-step process to cut the deficit about $2.8 trillion over a decade. Lawmakers have already largely agreed on caps to annual discretionary spending over 10 years. Officials from both parties say that would save $1 trillion, while the nonpartisan Congressional Budget Office puts the figure at $750 billion. REUTERS

Blow for US as China cuts its credit rating

Beijing: The world may be debating the consequences of the US move to raise its debt limit, but China’s state-controlled credit rating agency, Dagong Global Credit Rating Co, has cast the first stone by pushing US rating into negative territory.
The move may mean a drastic cut in China’s purchases of US bonds, putting US borrowings in jeopardy. China is the largest foreign holder of US debt, with holdings of $1.15 trillion as of April-end. “This will impact investors’ confidence in US Treasury bonds, affecting the stability of the US debt income,” Dagong said on Wednesday, announcing that it had cut the US credit rating from A+ to A with a negative outlook.
Debt relief replaced with recession fear One In Three Chance Of US Recession, Says Former Treasury Secy Summers
Singapore: In a matter of days, investor relief that the United States avoided default has been replaced by fears Europe’s debt crisis is deepening and the world’s biggest economy may be slipping back into recession.
Former Treasury secretary Lawrence Summers said there is a one in three chance of a recession in the United States. According to number crunching by Goldman Sachs, history suggests the economy is perilously close to tipping over the edge. Signs are little better elsewhere.

Italy and Spain are edging closer to the euro area debt danger zone, China’s economy is slowing and Japan is mired in recession after the March earthquake. The gloom is hitting the corporate world as analysts cut earnings forecasts globally, especially in exported economies, and big banks have announced tens of thousands of job cuts. “The odds of the economy going back into recession are at least one in three if nothing new is done to raise demand and spur growth,” Summers said of the United States in his column. “If these judgments are close to correct, relief will soon give way to alarm about the United States’s economic and fiscal future.”

The alarm bells may already be ringing. Most worryingly for financial markets, the US administration’s commitment to fiscal spending cuts could make any US downturn worse. “The slide in US growth expectations clearly comes with very poor timing,” said Commerzbank strategist Rainer Guntermann. “I think the conditions have completely changed this week,” said Koichi Ono, senior strategist at Daiwa Securities Capital Markets in Tokyo. “Until last week, people have been saying the US debt ceiling was the problem. Now they talk about worries about the health of the economy.”
Financial market pressure increased on Italy and Spain, pushing their borrowing costs to 14-year highs and sparking emergency talks among EU policymakers. The economies of Spain and Italy are much bigger than Ireland, Portugal and Greece that have been bailed out so far in the euro area debt crisis.

The rise in yields is the latest sign investors feel policymakers have not done enough to resolve the debt crisis. “The fear of the market is that the world is going into recession ... and in the euro zone the peripheral markets are the ones that will suffer most,” said Alessandro Giansanti, a strategist at ING Amsterdam.Views on the economic outlook were rapidly being revised, with JPMorgan cutting its forecast on 2012 US growth to 1% and markets reflecting expectations of more than 80 basis points of rate cuts in commodity exporter Australia—60 basis points more than a day ago. If the US unemployment rate keeps rising, it would be a strong warning signal that the US economy is close to another recession, Goldman Sachs says. Its examination of unemployment figures dating back to 1948 shows there is a 76% chance the US economy is either in recession or will be within six months. REUTERS