Go slowly waiting for the US vote. It is the photograph of the latest news on the European stock exchanges focused on the American debate before the vote on the ceiling of the US debt. Business Square advances by half a point in line with the other price lists. Note the new one decline in BTP yields (4,21%, -3 points) and the spread (181 points).
Stock exchanges latest news: Europe is doing well but the focus is on the US parliamentary battle
A group of Republican representatives said on Monday they would oppose a deal to raise the US debt ceiling by $31.400 trillion, in a signal that the bipartisan deal could face difficulties in Congress. But forecasts remain positive: “The agreement will pass. There's no question about it,” Republican Dusty Johnson said, adding that he spoke to dozens of congressmen. Biden also said he made several phone calls. “The feeling is good. We will see when the voting starts,” he told reporters. But why is this vote so important?
The debt ceiling: why it's so important
A bit of history. The debt ceiling, the debt ceiling, dates back to 1917. There were constant appropriations to be made for the Great War and it was not practical to raise the funding limit every time. Until then, every single bond issue had to be approved in advance by a law of Congress. What was supposed to be a wartime simplification turned over the years into a kind of guarantee institution.
Also in 2011 the United States came to one step from default. In the hot days of the 2011 clash, the stock market lost 17 percent and the country was locked down. Newt Gingrich, the Republican congressional leader who might one day run for president, gambled on his political career. Only in extremis Barack Obama and the Republican speaker of the House managed to avoid falling into the abyss like in a Bugs Bunny cartoon. But the cost to the economy was high: US finance was still grappling with the consequences of the default of Lehman Brothers and economists, led by Lawrence Summers, were suggesting a hefty dose of tax incentives to get the system going again. But, on the contrary, Obama was forced to practice a squeeze (4% of the budget) which lengthened the times of exit from the crisis.
The US debt ceiling: a long story and a happy ending looms
This time the plot of the film was much less dramatic. And a looms happy end assures Marc Zandi of Moody's: if the agreement between the Republicans and Joe Biden goes through, the impact on employment will be modest. Not only. The cuts, this time, will favor the stability of the system thanks to the contribution to fight against inflation. In fact, the situation that has arisen after the pandemic plays in favor of Biden. In summary, in 2011 Obama found himself cutting the budget despite an unemployment rate close to 10% without being able to count on the help of the Federal Reserve, given the level of interest rates close to zero. On the contrary, today Biden himself welcomes a budget cut from the current $1.700 trillion deficit, a legacy of pandemic aid, to more defensible levels: $55 billion less spending this year, $88 billion l 'next year.
Un modest sacrifice which among other things will allow the private sector, affected by the restrictions of regional banks, the space to resume the issuance of bonds to the point of absorbing excess liquidity. Thus facilitating the task of the Fed which, unlike 12 years ago, can count on rates which, at this point, can only go down. Hence the optimism of the president: “We are aware – said Biden in Japan – that cutting the deficit from the ceiling of 1.700 billion will not entail the risk of a recession. Indeed, it will be a growth factor”. This time, in fact, we start from an unemployment rate of 3,4% but also from an inflation rate well above 4%. A fiscal ministretta, capable of reducing the rise in prices by a good 0%, can do nothing but good.
But then why the very tough tug of war of the last few weeks?
Given this framework, one wonders the reason for the very tough tug of war of the last few weeks, which has led to a tangible risk of default. The conflict was purely political. Indeed ideological, given that a patrol of irreducible "Trumpians", about sixty parliamentarians, is in any case hostile to any agreement, just as the democratic left is ready to do battle against any limitation on spending. More still, a no-deal would cut the wings of any president's policy dooming Biden to defeat in the race for the White House next year. Donald Trump, on the contrary, has asked the troops of the Old Party not to join the agreement tomorrow. But Kevin McCarthy, Republican speaker of the House, as well as a large part of the party, does not want to play with fire, taking responsibility for the recession. Hence the belief that the agreement between the parties will hold. But what does the 99-page agreement signed on Sunday at dawn foresee?
- The defense sector (+3%, or 886 million dollars) and assistance to veterans are excluded from the cuts. Biden has accepted cuts on social assistance programs, in particular food stamps for the purchase of food for the most disadvantaged, as requested by the counterpart. Also reduced assistance programs for minors and the elderly, as well as immigration policy.
- The president also had to give in to the blackmail of Democrat Joe Manchin, the powerful representative of the coal lobby, who obtained a quick way to approve the Mountain Valley Pipeline, a gas pipeline in West Virginia and Virginia opposed by environmental groups.
Painful sacrifices, in short, but necessary. But now it's up to the classroom test. Always difficult, in Washington as in Montecitorio.
