Monday, November 21, 2011


A brutal year for global investors may get even worse if Congress proves yet again it is too bitterly divided to deliver on its promise to reduce the gaping U.S. budget deficit.

The congressional "super committee" created to slash $1.2 trillion in federal spending over 10 years was likely to concede failure in its efforts.

While a breakthrough could still happen before the committee's 23 Nov 2011’s midnight deadline, it was considered unlikely that the group could bridge deep partisan differences over taxes and spending.

While Moody's Investors Service has said a failure by the committee to reach an agreement would not by itself lead to a rating change, Fitch Ratings has not ruled out a "negative rating action" on the United States if the economy grows less than expected or if the super committee fails to agree on at least $1.2 trillion in deficit-reduction measures.

Such an action would most likely be a revision of the U.S. rating outlook to negative from its current stable position. When S&P’s downgraded the United States in August 2011, it said at the time that U.S. fiscal plans fell short of what was necessary to stabilize debt dynamics.

The biggest concern is not the cuts as such but the sense that Democrats and Republicans are simply unwilling or unable to compromise and make the tough decisions required to bring a deficit that's near 10 percent of gross domestic product under control.

Some investors do fear that deadlock may imperil White House efforts to extend a temporary payroll tax cut and jobless benefits for the long-term unemployed, and that would be another negative for growth at a time when the economy can least afford it.

While not expected, a deal to cut the full $1.2 trillion would probably provoke a relief rally in markets. Expectations are low after the debt ceiling debacle, but if they get to $1.2 trillion, it would instill some confidence in the political process.

Bond investors say deadlock probably won't hurt the bond market, either, since Europe 's problems should sustain a safe-haven bid for Treasuries.

And if stocks do wobble, another round of monetary easing from the Federal Reserve, which has toyed with the idea of pumping more money into the system by doing additional purchases of mortgage-backed debt, could help support asset prices.

In the long run, though, the parallels with Europe 's most troubled countries becomes more striking and harder to ignore. America is treading a path similar to the one that led Italy, Greece and others into trouble: borrowing money at low interest rates to boost short-term growth and swelling the debt burden.