Last week FT Alphaville listed some of the items that would affect how much fiscal drag the US economy would confront in the next couple of years.
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US lawmakers charged with crafting a deficit reduction agreement in the next three weeks remain deadlocked but fears that the impasse might lead to a new credit downgrade receded on the back of a new report from Moody’s Investors Service, the FT reports. Negotiations to strike a deal that could revive confidence in America’s ability to control its public finances are reaching a critical juncture, with a 12-member panel of Congress – equally split between Republicans and Democrats – weighing competing proposals to break the impasse. But so far there is scant evidence that a large-scale fiscal compromise is in the works, with big divisions persisting, particularly over taxes. The so-called “supercommittee” is due to report on November 23, and if a majority cannot recommend at least $1,200bn in savings for the US government over the next decade, a “trigger” will force automatic spending cuts worth that amount starting in 2013.
Congressional analysts painted a rosier picture of the US budgetary picture for the next decade on the back of this month’s deal to increase the debt ceiling, but offered a bleaker portrait of the country’s economic recovery, the FT says. In a report that will serve as a reference for the political battles ahead on fiscal policy, the Congressional Budget Office said on Wednesday that the US will rack up $3,487bn in deficits between now and 2021, much narrower than the $6,737bn fiscal gap it estimated earlier this year. The improvement is the mostly the result of the agreement struck three weeks ago by Congress and the White House, which will generate $2,100bn in savings for the US government over the next decade. Lowered interest-rate expectations also helped to shrink deficit projections, the CBO said.
Chart via Societe Generale, and to be read in conjunction with the Troika finally admitting that Greece has failed to control its deficit as it demanded in 2011:
While the size of fiscal adjustment being asked for in Greece (and Ireland actually) is in itself historically unprecedented, the pace of adjustment is even more off the charts, SocGen suggests. We reckon that’s quite important when the Troika is going on like a broken record, and arguing that the best solution is to speed up austerity even more. Read more
The White House’s FY2012 budget is out:
This is, of course, just a proposal — it’s now up to Congress to amend, appropriate and approve. That’s the theory, anyway; we’re still waiting for that FY2011 budget and the next extension for a continuing resolution to, um, fund the government runs out on March 4. Read more
Republicans in the US Congress have set up a showdown over fiscal and budgetary policy for early 2011 after deciding to approve temporary government funding only until March, reports the FT. Democrats and the White House had tried to clinch a deal with Republicans to prevent a shutdown of federal operations until the end of the 2011 fiscal year in September. But one proposed measure – a 1,900-page spending bill – drew Republican fire after it included $8bn in earmarks, or pet projects for individual lawmakers – not all of them Democrats.
Have US bondholders gone on holiday already?
10-year Treasuries reached a high of 3.39 per cent on Monday before falling sharply. Read more
Democratic leaders in the Senate forged ahead with plans to vote on a deal championed by the White House to extend Bush-era tax cuts and unemployment insurance, after changing the proposed legislation to include a series of tax credits to promote production of renewable energy the FT reports. “This bill is not perfect, but it provides the economic boost middle class families . . . need,” said Harry Reid, majority leader, as he unveiled the proposal, which will be debated in the coming days with a vote on Monday. Apart from the addition of the energy provisions, the Senate version of the bill largely tracks the terms agreed by Barack Obama, US president, and Republican leaders early this week, and appears likely to be approved by the upper chamber. The FT also reports that the White House was facing pressure to present a detailed plan to address the dismal fiscal outlook in the US, following a meeting with members of a bipartisan panel that last week suggested $3,900bn in budget cuts by 2020.
The first big test of whether the newly emboldened Republicans can work with the Obama administration on the fiscal challenges facing the US will come before new lawmakers are inaugurated in January, the FT reports. During the so-called “lame-duck session” set to begin in mid-November, Congress will take up the fate of the more than $3,000bn in Bush-era tax cuts that are set to expire at the end of the year. Republicans have been pushing for an extension of the package for all Americans, while Democrats argue that the cuts should be allowed to expire for those earning more than $250,000 per year. The FT also reports that President Barack Obama on Wednesday challenged victorious Republicans to work with him on new initiatives to boost the economy and create jobs, in the wake of the largest Congressional defeat in more than half a century. The president took “direct responsibility” for his administration’s lack of progress on the economy, striking a sombre tone after American voters delivered what he called a “shellacking”’ at the polls halfway through his first term.
Vital signs have suddenly taken a turn for the worse. Read more
Here’s a somewhat surprising finding from BNP Paribas’ Bartosz Pawlowski.
A closer look at the adverse scenario assumptions made by the Committee of European Banking Supervisors (CEBS) for use in the European stress tests reveals one particular recession-defying European country high up in the sovereign haircut leagues. Read more
The debate on the economic of success of President Obama’s stimulus program is hotting up eighteen months after it began, with deficit concerns coming to the fore, reports the WSJ. Arguments over the $862bn measure have become especially acute as both parties weigh up how to replace Bush-era tax cuts expiring at the year’s end. Federal stimulus will leave behind a mixed fiscal picture for U.S. states when it too ends, the FT adds, noting that tax revenues look set to improve in 2011, after investor fears over the size of many municipal fiscal deficits.
ING’s Simon Goodfellow looks at the Spanish issue this week.
His main question — “What would happen to the banking system in Spain if the Spanish housing crisis turned Japanese?” Read more
Painful numbers out from Eurostat on European fiscal deficits on Thursday: the statistics agency revised Greece’s fiscal deficit upwards by a full percentage point and cast doubt on the quality of data provided by the Hellenic Republic.
Not the best mood music for a Greek debt rescue, then. Read more
As FT Alphaville noted in the aftermath of the signing into law of the Obama administration’s health care bill, US companies are waking up to the reality of what health care reform means for them.
Back at the White House, administration officials have challenged companies’ assertions that they will be negatively affected by the reform, saying attendant tax changes were “nothing compared to the enormous financial benefits” the companies would receive under other measures included in the legislation. Read more
The US 10-year swap rate traded below the 10-year Treasury yield for the first time yesterday, as hedging activity from corporate bond deals helped break a fundamental relationship between derivatives and bonds, reports the FT. FT Alphaville looks at the story in more detail. Read more
The prospects for Barack Obama’s healthcare reform legislation brightened considerably on Thursday, when the independent Congressional Budget Office said the final bill would cut the US deficit by more than $1,300bn over the next 20 years. In anticipation of a vote on the bill on Sunday, Mr Obama postponed his trip to Indonesia and Australia for a second time. He now plans to now go in June.
Barclays Capital has run a useful exercise on Greece to try and understand the magnitude of the problem facing Europe.
Rather than looking at the country’s outlook based on the fiscal adjustments currently being implemented, the bank’s analysts have assumed a so-called inertial primary balance – or, how debt dynamics would play out without any fiscal adjustment what so ever. In other words, how long it would take to balance the debt position as it stands now. Read more