Bundesbank urges US to solve fiscal uncertainty

Monday 07 October 2013 17.50
US government shutdown continues as row over US debt ceiling grows
US government shutdown continues as row over US debt ceiling grows

The US should solve its fiscal uncertainty as soon as possible, Germany's Bundesbank said today, reminding the US of its influence and importance for the global economy.

As the US government moved into the second week of a shutdown with no end in sight, a deadlocked Congress also confronted an October 17 deadline to increase the nation's borrowing power or risk default.

"In view of its importance for the global economy, it is crucial that the US solve the current fiscal uncertainties quickly," Bundesbank board member Andreas Dombret said.

He was speaking ahead of the International Monetary Fund's autumn meeting in Washington.

The Bundesbank also called for further structural reforms and a full implementation of the bailout programmes, despite recent signs of improvement.

"The Bundesbank shares the IMF's view that growth in developed countries has firmed up. In the financial markets, uncertainty has decreased. At the same time, economic challenges remain high," Dombret, who is in charge of financial stability on the Bundesbank board, said.

"Especially the fact that economic development has weakened in some emerging markets puts the focus on structural weaknesses on some of the countries," he said.

Looking at the euro zone, the Bundesbank's man said that despite first successes, countries should not let up in implementing the agreed programmes as well as conduct fiscal and structural reforms.

Boehner won't raise US ceiling without serious conversation

Meanwhile, Republican House of Representatives Speaker John Boehner vowed not to raise the US debt ceiling without a "serious conversation" about what is driving the debt, while Democrats said it was irresponsible and reckless to raise the possibility of a US default.

The last big confrontation over the debt ceiling, in August 2011, ended with an 11th-hour agreement under pressure from shaken markets and warnings of an economic catastrophe if there was a default. A similar last-minute resolution remains a distinct possibility this time.

Equities investors were unnerved by the apparent hardening of stances over the weekend, with European shares falling to a four-month low today. US stock markets also opened weaker on Wall Street today.

In comments on television political talk shows yesterday, neither Republicans nor Democrats offered any sign of impending agreement on either the shutdown or the debt ceiling, and both blamed the other side for the impasse.

"I'm willing to sit down and have a conversation with the president," said Boehner, speaking on ABC's "This Week." But, he added, that President Barack Obama's "refusal to negotiate is putting our country at risk."

On CNN, Treasury Secretary Jack Lew said: "Congress is playing with fire," adding that Obama would not negotiate until "Congress does its job" by reopening the government and raising the debt ceiling.

China, the biggest holder of US Treasuries, has also urged Washington to take decisive steps to avoid a crisis and ensure the safety of Chinese investments.

"The US is totally clear about China's concerns about the fiscal cliff," Vice Finance Minister Zhu Guangyao said in the Chinese government's first public comment on the October 17 deadline.

"We hope the US fully understands the lessons of history," Zhu said in Beijing, referring to the downgrade of the US credit rating by Standard & Poor's in 2011. China held $1.277 trillion of US Treasuries as of last July, according to US Treasury data released month.

The two issues of the Federal government shutdown and the debt ceiling started out separately in the House but have been merged by the pressure of time.

Conservative Republicans in the House have resisted funding the government for the current fiscal year until they extract concessions from Obama that would delay or defund his signature healthcare law, which was launched on October 1.

Many of the conservatives want a similar condition placed on raising the debt ceiling, but in his list of debt-ceiling demands on Sunday, Boehner did not mention the Affordable Care Act, commonly known as Obamacare.

White House officials were firm today that Obama will not negotiate under the threat of a default and repeated that it is up to Congress to raise the US borrowing cap.

While the shutdown itself is unlikely to cause major disruption in the markets, a fight over the debt ceiling could. From July 31 until August 2 during the debt-limit standoff in 2011, the S&P 500 index lost 3%, and the deadlock led to a downgrade of the US credit rating to AA-plus from AAA by S&P.

The outlooks from Moody's and S&P, the only agency so far to have lowered its rating on US debt, are both at "stable," but Fitch Ratings has indicated a negative outlook for the US debt rating.

All three agencies have said the US debt profile has improved substantially over the past two years, with GDP growth, while slow, proving to be persistently positive and the budget deficit trending lower.

Fitch said in a note last week that the US rating is at risk in the current showdown over the debt ceiling because failure to raise it sufficiently in advance of the deadline raises questions about the full faith and credit of the US to honour its obligations.

Political gridlock remains the greatest risk to the US outlook, Fitch said in the note on October 1, the first day of the partial government shutdown.

"This 'faith' is a key underpinning of the U.S. dollar's global reserve currency status and reason why the US 'AAA' rating can tolerate a substantially higher level of public debt than other 'AAA' sovereigns," Fitch said.