Wednesday, July 20, 2011

Deficit cuts: Too much, too late?

US debt ceiling: 'Gang of Six' inject hope into talks

Group of influential senators make a proposal that might win the support of both President Obama and the Republicans
    US president Barack Obama makes a statement to the press on US debt ceiling
    US debt ceiling: US president Barack Obama makes a statement to the press Photograph: Jason Reed/REUTERS
    A last-ditch plan to resolve the deadlock over America's debt ceiling has raised hopes that the world's biggest economy could avoid a potentially catastrophic default, as Europe remains bogged down in its own financial crisis. Financial markets rallied on Wednesday after a group of senators dubbed the "Gang of Six" unveiled a proposal that might win the support of both President Obama and the Republican opposition. Asian and European stock markets posted gains, the oil price rose, gold lost ground, and the dollar fell against the euro – all signs that investors were less fearful about the future. The Gang of Six's plan attempts to stake out the middle ground between the two opposing sides. It includes deficit cuts of almost $4 trillion (£2.48tn) over the decade, including reductions in spending on health programmes – but may appease Democrat concerns by guaranteeing some essential services. It also calls for $1tn of increased tax revenue, but balances this with income tax rate cuts that could find favour with Republicans. Obama called the proposal a "very significant step", and urged the three Democratic and three Republican senators to develop it. "My hope ... is that they are prepared to start talking turkey and getting down to the hard business of crafting a plan," Obama told reporters on Tuesday. America has less than two weeks to agree a plan to raise its debt ceiling from the current maximum level of $14.3tn, which was reached in May. The US Treasury predicts that the country will run out of resources to pay its bills on 2 August, but some experts believe a deal must be reached by this Friday to allow time for legislation to be written, debated and approved. City traders were also encouraged by signs of progress in the US debt ceiling talks, but warned that investors remained wary. "The consensus has always been that political posturing would see this go to the wire before an acceptable resolution was found, but it has presented an uncomfortable scenario to holders of treasuries and arguably won't stand to do the US any favours in the longer term," said Ben Potter, market strategist at IG Markets. "That aside, the Dow added 202 points yesterday and gold is in retreat, two clear signs that some confidence is seeping back in to equity markets now," Potter added. Agreeing to raise the debt ceiling would avoid the immediate risk of default, but not address the underlying weaknesses in America's economy. Ratings agency Standard & Poor's warned this week that it might strip the US of its prized AAA rating even if a deal is reached, questioning whether Washington can get to grips with the swelling national debt.

    Who are the Gang of Six?

    The bipartisan group is led by Democrat Mark Warner, the junior US senator from Virginia, and Republican Saxby Chambliss, the senior US senator from Georgia. The pair may appear unlikely bedfellows – Warner, a potential presidential candidate for the 2008 election who chose not to run, is regarded as one of the most liberal members of the senate, while Chambliss's voting record is seen as conservative. On the Democratic side, Illinois senator Richard Durbin is the assistant majority leader in the Senate and also has strong liberal credentials. Senator Kent Conrad of North Dakota played a key role in pushing through Obama's healthcare bill. For the Republicans, Tom Coburn of Oklahoma and Mike Crapo of Idaho both served on Obama's bipartisan fiscal commission. Coburn has pushed the group into accepting deeper spending cuts and is generally seen as an opponent of higher taxes. His favoured option is to cut spending by $9tn over the next 10 years, including reductions in military spending. Crapo has backed reforms to the US tax system to stimulate economic growth and job creation.Read more...

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