Economy Dec 27, 2012
New York: Gridlock in Washington has America on edge as the year-end deadline draws near without an agreement to forestall the tax increases and spending cuts known as the fiscal cliff. Economists have warned that if the Bush-era tax cuts expire on 1 January it could push the soft US economy back into recession. To make matters worse, Congress has also failed to create legislation to raise the debt ceiling.
The US government will hit the $16.4 trillion federal borrowing limit by 31 December, setting in motion "emergency measures" that might buy the government time until February or March before it faces a full-blown debt crisis, Treasury Secretary Tim Geithner warned in a letter to Congress on Wednesday.
Geithner told senior lawmakers the Treasury would begin to undertake extraordinary steps to stave off default by making about $200 billion in additional funding available to the government, giving Congress two months before it must raise the debt limit. The Treasury said it would halt payments on federal pensions to create additional financial resources.
You might think the Indian government takes the cake when it comes to policy paralysis, but the US Congress also has a penchant for getting stuck in astounding policy gridlock.
The last time the US Congress failed to come to a bipartisan agreement on raising the debt limit in August 2011 it endangered America's credit rating. After the bitter fight in Congress over raising the debt limit in the summer of 2011, Standard & Poor's downgraded the US government's credit rating to AA+ from AAA.
Fitch ratings agency repeated a warning last week that it may strip the US of its AAA credit rating in the absence of a debt deal and if Washington is unable to strike a deal soon to avert the fiscal cliff.
"If the negotiations on the fiscal cliff and raising the debt ceiling extend into 2013 and appear likely to be prolonged with adverse implications for the economy and financial stability, the US sovereign rating could be subject to review, potentially leading to a negative rating action," Fitch said.
"There's a sense that the US economy is looking down the barrel of a gun but [Washington] cannot figure out what to do," Peter Kenny, managing director at Knight Capital Group toldThe Wall Street Journal.
"These downgrades are coming, as sure as the sun comes up tomorrow. They're a foregone conclusion," said Kenny.
Daniel Clifton, a policy strategist with Strategas Research Partners, also predicted further downgrades, "a first downgrade from Moody's and Fitch and possibly a second downgrade from S&P."
"Even with the automatic cuts coming into place, the US is facing a rising debt to GDP ratio," Clifton said in a note to clients. "Questions will legitimately be raised whether Congress can deliver on the remaining $2 trillion of savings needed to stabilize the US debt to GDP ratio."
Even if President Barack Obama and Congress pull off a last-minute deal that blunts the impact of the fiscal cliff, it is possible that the White House and the Republicans in Congress are setting themselves up for yet another battle over legislation to raise the debt ceiling in a month or two.
The US government is constrained by a hard legal limit on the level of debt it can accumulate, which is raised at the discretion of Congress. To finance its deficits, the US government borrows money from investors by issuing debt.
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