Rocky road ahead in US debt war

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Rocky road ahead in US debt war

Rocky road ahead in US debt war
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On Capitol Hill politicians breathed a sigh of relief after the House of Representatives approved a deal to prevent the US from defaulting on its debt. The Senate was due to vote later on Tuesday.

However, markets and investors remain alarmed at the state of the American economy, and the prospect that Washington could lose its triple-A credit rating.

euronews sought the views of Manoj Ladwa, Senior Trader with the financial services company ETX Capital in London.

Alasdair Sandford, euronews: “There’s a lot of backslapping and relief in the States at this deal. But for you, do the sums add up?”

Manoj Ladwa, ETX Capital: “Well the sums add up, but it’s just one of many hurdles that the US administration needs to get over. Now it shouldn’t have really come to this situation, we’ve seen debt ceilings being breached in the past and they’ve gone on to be raised. In fact over the last 50 years the debt ceiling has been raised about 70 times, so it shouldn’t really have come to this situation.

“I think it is a fairly important juncture in the US economy at the moment, in that the possibility of a ratings downgrade is very real; the GDP numbers last week were extremely weak. There are a number of factors that are being watched very closely.”

euronews: “Are they short-term factors or do they indicate some real long-term problems with the American economy?”

Ladwa: “Well we’ve seen what’s been happening in recent years, especially with regards to the banking crisis and the credit crunch, and the subsequent stimulus spending – and it hasn’t really been enough to spur the economy onto growth. And therefore, there’s only so much that the Federal Reserve can carry on pumping into the economy, and it looks likely that it needs to retrench, it needs to possibly dip back into recession before it powers its way outwards. It looks like it’s a longer-term situation certainly, over the next year or two the US economy is going to find it difficult.”

euronews: “And what would be the consequences of a credit downgrade?”

Ladwa: “Well certainly for the US it’s huge because all of a sudden, the holders of that debt – the banks, companies, the financial institutions and even wealthy individuals – will see the value of their holdings erode, and it’s likely that they could start to sell some of that US debt on the open market. It would have an impact on the financial sector, on the housing sector as well.

“And also we forget that a large amount of US debt, almost 50% of it, is held by foreign investors. And China being one of the main investors in US debt, if they see the value of their holdings drop significantly, then they could come to the market and begin to sell US debt, which would further increase moves to the downside.”

euronews: “So what are investors looking to the US to do right now?”

Ladwa: “They certainly don’t want another stimulus spending package, because that further fuels the amount of debt that the US already has on board. What would be ideal is for the economy to start exporting more, (for) jobs to be created… we’ve got unemployment up at 9.2%, it’s stuck there, it doesn’t seem to be dipping any lower… We need jobs to be created, we need the economy within the US to spur onwards and upwards, and to power out of what looks like could be a double-dip recession.”

euronews: “So overall, if you were to judge this deal, would you say it’s the US beginning to put its budget house in order, or is it just another short-term fix aiming at putting off problems?”

Ladwa: “Well, it’s exactly that. It’s a two-year fix to stave off what could be another debt ceiling hike, soon after the presidential elections. It seems like a medium-term fix to a long-term problem. And ultimately the US needs to get its house in order and rein back the levels of debt. Unfortunately I don’t see it doing that in the near term.”