Long-run problems still exist: analysts

08:37, August 02, 2011      

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The framework of the deal reached by the US Congress to avoid a crippling debt default provides short-term relief for global investors, but it won't have a major effect on the nation's entrenched debt problem, economists said.

After weeks of bipartisan wrangling, the US Congress finally reached a deal on Sunday, avoiding what could have turned into a global financial meltdown.

The deal would raise the US debt ceiling by as much as $2.4 trillion in two stages while promising an initial $917 billion in spending cuts over 10 years. A special congressional committee will be organized to find another $1.5 trillion in deficit cuts.

The US Senate and House of Representatives are expected to vote on the deal on Tuesday.

A deal would mean that one of two threats to global financial markets, the European sovereign debt crisis and the US debt ceiling, is removed, said Zhou Hao, an economist at the Australia and New Zealand Banking Group Ltd.

"That would remove some of the risk premiums priced in and give the financial markets a short-term rally."

Financial markets gained immediately after the deal. Asian stocks mostly rose, with the Japanese stock index up about 2 percent. Chinese stocks rose for the first time in three days.

The yen weakened against all of its major counterparts after the deal reduced investors' demand for refuge currencies. The Swiss franc and gold, two safe havens for investors, also slipped.

"The Swiss franc and gold have more room for retreat in the short term as the worst-case scenario has been removed from the financial markets," Zhou said.

"But in the long run, they will go up again, as the deal does not eliminate the possibility that the US' AAA credit rating could be downgraded."

The $2.4 trillion spending cuts come at a time when the US growth has been sputtering, raising fears that fiscal austerity could push the world's biggest economy into further recession.

Data released on Friday showed that the US economy expanded just 0.4 percent in the first quarter and 1.3 percent in the second quarter.

Zhao Xijun, a finance professor at the Beijing-based Renmin University of China, said the spending cuts won't be a big drag on the US economy as the amounts are very limited when spread over a 10-year period.

"The reduction of around $200 billion a year will have a minimal effect on the US economy. The 10-year time span is pretty long, and it is unknown whether or not the next US president will continue this policy," Zhao said.

He added that the spending cuts, like the higher debt ceiling, are just a symbolic move to boost investor confidence and won't solve fundamental problems in the US economy.

Source:China Daily
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