Fri, Oct 18, 2013 - Page 1 News List

Relief around the world as US avoids default


Political leaders, investors and ordinary people yesterday welcomed the end of a US government shutdown, but were already looking ahead to the next round of a budget battle that brought the world’s biggest economy close to default and threatens Washington’s international standing.

The deal approved late on Wednesday by the US Congress, with hours to go before the government reached its US$16.7 trillion debt limit, only permits the US Department of Treasury to borrow through Feb. 7 and fund government through Jan. 15.

The standoff rattled global markets and threatened the image of US Treasury debt as a risk-free place for governments and investors to store trillions of dollars in reserve.

Few expected a default, but some investors sold US Treasuries over concern about possible payment delays and put off buying stocks that might be exposed to a US economic downturn.

IMF managing director Christine Lagarde welcomed the deal, but said the shaky US economy needs more stable long-term finances.

“It will be essential to reduce uncertainty surrounding the conduct of fiscal policy by raising the debt limit in a more durable manner,” Lagarde said in a statement.

The Tokyo stock market, Asia’s heavyweight, gained 0.8 percent yesterday. Markets in South Korea, Australia and Southeast Asia also rose.

Such relief might be only temporary without a long-term settlement, Standard Chartered economist Samiran Chakraborty said in Mumbai.

“In three months’ time, this could be back again,” Chakraborty said. “If this kind of pushing it back happens several times, then this comfort that the markets had over the last 20 days that a deal will be reached, that comfort may now be dead.”

Moreover, the congressional cliffhanger might dent longer-term confidence in US government debt, a cornerstone of global credit markets, prompting creditors to demand higher interest.

“With the US government’s antics, the risks go up, so the cost of money could go up too,” said Nick Chen, managing partner of Taipei law firm Pamir Law Group.

Big Asian exporters, including China and South Korea, also faced the risk of a slump in global demand if a US default had disrupted other economies.

China’s government, Washington’s biggest foreign creditor with US$1.3 trillion invested in Treasuries, welcomed the end to the standoff.

“This issue concerns many countries in the world,” Chinese foreign ministry spokeswoman Hua Chunyin (華春瑩) said at a regular briefing. “The United States is the biggest economy in the world. For them to handle the issue properly is to their own interest and beneficial to their own development. We welcome their decision.”

Chen Ju, an employee at a Shanghai fast food company, said she sold stocks when she heard the US government shut down. She said she was ready to get back into the market, but would look for safety.

China and Japan, which each own more than US$1 trillion of Treasury securities, appealed earlier to Washington for a quick settlement. There was no indication whether either government had altered its debt holdings.

South Korea’s government has US$51.4 billion of Treasury securities, while Taiwan has US$185 billion.

In Israel, a key US ally in the Middle East, commentators said the fight hurt the US’ overall image.

“There is no doubt that damage was done here to the image of American economic stability,” Israel’s economic envoy to Washington, Eli Groner, told Israel’s Army Radio. “It’s not good for the financial markets, not in the United States and not around the world.”

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