Wednesday, 3 August 2011

Who gains from the US debt crisis?

The United States of America's decision to avert a sovereign default was cheered by the global markets yesterday. But has it done any good to the nation, world and who is the actual loser in the long run?
The deal that was passed on Monday midnight got the Congress approval approval on Tuesday. Here is what the deal says:
"The two-stage plan calls for $2.4 trillion in savings over the next decade, although the the Congressional Budget Office pegs the savings at $2.1 trillion. It also authorizes an increase in the nation's borrowing limit through the end of 2012. A special congressional committee to recommend long-term fiscal reforms is also part of the package."
What is Debt Ceiling?
Debt ceiling is a cap set by Congress on the amount of debt the federal government can legally borrow. The cap applies to debt owed to the public plus debt owed to federal government trust funds such as those for Social Security and Medicare.
The first limit was set in 1917 and set at $11.5 billion, according to the Center for a Responsible Federal Budget. Previously, Congress had to sign off every time the federal government issued debt.
But why was it so critical for the US government to pass the deal?
If Obama's government had ignored this ceiling then it could not have paid salaries it employees, army men and also couldn't have paid of the money committed to various welfare schemes.

So who decides this ceiling?
There is no one answer to this question. No one admits but lawmakers have been raising the debt ceiling every time they vote for a spending hike or tax cut.
Over the years the ceiling has been raised several times and analysts argue that there is a fundamental issue with the way debt is being repaid by the government.
Immediate Issues to tackle
So here is an economy that is aiming at fiscal consolidation but struggling to recover from the recession. The tea party might have agreed to increase the ceiling but there is more depressing news for investors across the globe. US economy is still growing at a very slow pace of just 1.4 percent and the unemployment is refusing to come below the nine percent mark. The debt deal doesn't clearly set a path to increase spending, in fact with more government stimulus "off the table," the slow-growing economy cannot generate enough jobs to pull down the unemployment rate.
Experts are now wondering what would be the implications on the world economy. The debt deal emphasizes on spending cuts and less on how are they going to cover the costs. An article in Firstpost points out that it is the US that is going to suffer the most than any other country as it might even lead to a double dip.
Fitch Ratings, meanwhile indicated the deficit must be reduced to a "more sustainable level" for the US to maintain its AAA rating. And Standard & Poor's has said any deal to raise the debt ceiling must cut at least $4 trillion from future budget deficits or the rating will probably be lowered to AA.
Obama and his team themselves agreed that compromise deal reached was not perfect. But they stressed it was needed to avert a US default debacle.
"This has been a long and messy process and as with any compromise the outcome is far from satisfying," Obama said in a video message to supporters issued by his 2012 re-election campaign. "But it has also launched an important debate about how we approach the big challenges we face."
So is US still the super power?
Americans voted for Obama in 2008 hoping that he might help them come out of the worst slowdown in American history. But nothing has changed much since then.  In fact a lot more Americans now believe that in the age of Obama their nation has stepped into an austerity phase where invariably it will lose control over the international economy.
Currently, no economy is ready to take place for dollar but with Europe also engulfed in its debt crisis; all eyes would be on growing economies like India and China. But this doesn't mean that India and China won't be impacted if there is a double dip.
Impact on India:
For emerging markets like India that ship a chunk of their exports to the US, the impact will depend on how US lawmakers agree to stagger the cut in expenses. Chairman of of the prime minister's economic advisory council, C Rangarajan indicated that India's growth story will be affected due to the US debt crisis. If the US government in its policy halts on imports to cut costs, India's export is expected to be hit badly. The sector had seen a sharp decline in the year 2008.
The IT/ITes sector that heavily depends on the US markets for its revenues is keenly following the proceedings in US. In fact during an interaction with the press at the Infosys campus in Mysore, Kris Gopalakrishnan, CEO, Infosys Ltd  said that they had learnt some lessons from the 2008 recession. He added that Infosys will be cautious in US markets and is taking the necessary precautions to face the debt crisis. Vineet Nayyar, CEO, HCL Technologies in an interview to Live Mint said:
"If recession happens in the US and large companies go down, that will have a significant impact on the overall IT spends."
Financial expert Devangshu Dattta echoed the same views. He told, "We can't call it a second dip. If US would have defaulted then things would have been even worse. However in the next few quarters US might see negative growth." He added that India might not be directly affected. But all export oriented services might see a slowdown. "Given that India has seen good growth in the last three quarters, we might see a slowdown due to the debt crisis. But the silver lining would be if, India achieves eight percent growth by the end of the year. On the other hand in the short term we can also expect a slowdown in FII inflows and rupee might strengthen against the dollar," said Datta.
Thus, India might not affected directly but the ripples would be felt.
However if this analysis proves too heavy for you to understand, here is a simpler version.

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