Pain from US debt stand-off far from over

Pain from US debt stand-off far from over

Bickering US lawmakers may have approved a measure to reopen the government and pull it back from the brink of a catastrophic debt default, but substantial damage has already been done.

The bitter stand-off hurt everything it came into contact with: the ratings of US politicians from both parties, the US economy and local businesses, the country's international standing and cross-border engagement plans, all its citizens and residents, and even the White House vegetable garden.

Economists estimate the US government's shutdown since Oct 1 has cost billions of dollars, shaving off anywhere between 0.3 and 0.6 percentage point from fourth-quarter growth.

And it wasn't just Americans who suffered. Foreign students and workers applying for US visas, tourists in the United States and anyone dealing directly or indirectly with US federal processes reeled from the government shutdown.

But more long- lasting could be the consequences of the near-US default.

Global investors dumped short-term US bonds and questioned anew the greenback's status as a reserve currency, while world leaders from Singapore to Saudi Arabia came out to chide the US' top politicians as though they were recalcitrant teenagers.

Fitch Ratings put the US' credit rating on negative watch and could still become the second agency to strip US debt of its top rating, after Standard & Poor's did so in August 2011 following a similar debt debacle. This would likely lead to turmoil in credit markets as traders reprice the ubiquitous US bonds used as collateral.

And the pain is far from over. Even as world leaders and global markets on Thursday cheered the news of the US deal, analysts are eyeing the next likely stand-off - early next year.

Thursday's deal only funds US government spending until Jan 15 next year, and extends its borrowing authority until Feb 7. Without a more permanent solution, the squabbling is expected to start again in a few months.

"The deal merely kicks the can further down the road, and the next fiscal battle already looms on the horizon," said ABN Amro economist Georgette de Boele.

US House Republicans, who had triggered the impasse by refusing to pass the government's budget and raise its debt limit, are already preparing for Round Two.

"We can all take a deep breath... knowing we have January out there - and refocus on trying to get some big things," Illinois Representative Adam Kinzinger told The New York Times.

Meanwhile, the economic uncertainty and setbacks created by this month's gridlock have increased the likelihood of the US Federal Reserve delaying its dreaded monetary stimulus tapering.

As economists await key data held back by the shutdown, a growing number are tipping that the pullback will start in January - which would coincide with the fiscal deadline and could create chaos if not managed properly.

The bottom line, which becomes clearer with each US fiscal meltdown, is that the world's largest economy must embark on a longer-term solution for its debt woes and processes.

"It will be essential to reduce uncertainty surrounding the conduct of fiscal policy by raising the debt limit in a more durable manner," said International Monetary Fund managing director Christine Lagarde on Thursday.

The US' unsustainable budget deficits and uncertainty resulting from its fiscal fights have cost the economy 1 percentage point in growth each year since 2010, said research group Macroeconomic Advisors this month.

"It is clear that unless Congress does away with the debt ceiling limit permanently, the issue will come back to haunt us again," said United Overseas Bank economist Alvin Liew.

"The underlying political divisions will still be with us in early 2014; we may be looking at a series of short-term deals and patches rather than a longer-lasting budget solution," added Mr Russ Koesterich, global chief investment strategist at investment firm BlackRock.

"If next year's mid-term elections (to elect Congress) maintain the status quo - bitterly divided government and heightened partisanship - this may become a depressingly familiar pattern over the next three years."


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