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Watching the debate, U.S. markets show no panic yet

By Agence France-Presse
Sunday, July 24, 2011 18:32 EDT
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Market experts are closely following the US debt ceiling talks, but they appear more worried about the economic impact of failure to reach an accord rather than a dramatic slide in the stock market.

Still, it is the fear of a dramatically lower stock market opening Monday that has helped propel congressional leaders and the White House to try to finish hammering out a long-term deficit reduction plan this weekend.

Market analysts told AFP that while the markets might be nervous, they are hardly on the verge of panic, just 10 days before an August 2 deadline for the United States to default on its debt.

Certainly the markets “would have sold off” Friday if talks had collapsed between the White House and Republicans during trade, said David Kotok, the president of Cumberland Advisors.

Instead, Republican House Speaker John Boehner made a shock late evening announcement that he was quitting negotiations with the president in favor of talks only with Senate leaders.

By now, Kotok said, the markets have had time to “digest” the news.

While still skittish, “the minute there is a glimmer of resolution,” they will become very robust, he added.

And Boehner has since told fellow Republicans he hoped for a deal with Democrats by Sunday evening.

Such a breakthrough aimed to reassure jittery world markets that the world’s richest country would pay its bills after August 2, with Asian investors first to render their judgment on the stalemate in a matter of hours.

At Natixis bank, economist Evariste Lefeuvre said the “11th hour” mentality will “hurt the dollar in the days ahead.”

Still, Lefeuvre asked, even if the United States briefly defaults, or the rating agencies downgrade US debt, where else will people turn?

“Investors who hold US debt, are they going to sell it… and buy German, French or Dutch debt?” he asked.

The challenge is the lack of secure debt alternatives in sufficient quantities with the safety of US Treasury notes.

“There is no safe alternative to $8 trillion dollars in American debt,” said Lefeuvre. A sudden collapse in the US markets, therefore, is not on the horizon, he believes.

“The real risk is an aversion to risk in general,” he said, adding that rising interest rates could undermine an already fragile recovery.

Lefeuvre said it’s not certain that US stocks will tumble if the debt ceiling is not resolved, since the US economy still remains one of the strongest in the world.

On the other hand, the absence of a debt deal could have a “dramatic” impact, he noted, especially if the Obama administration decides to pay back its creditors before distributing retirement and health coverage payments.

“It might not be in default on its debt, but that would come at the price of an immediate and very violent contraction in public expenditures,” with a sharp reduction in disposable household income to follow, said Lefeuvre.

The problem, said Kotok, is that the “economic impact is already showing, in the employment statistics, and in shrinking local governments… it already is drastic.”

Kotok said that if a deficit reduction plan is reached, the markets will move higher in August.

For commodity analyst Matt Smith of Summit Energy, an agreement still appears inevitable.

“If there isn’t a solution, there will be an immediate reaction,” he said. “But right now, it seems such an outlier that not many people are taking it into account… there’s a certain amount of complacency, everyone still believes there will be a resolution.”

Agence France-Presse
Agence France-Presse
AFP journalists cover wars, conflicts, politics, science, health, the environment, technology, fashion, entertainment, the offbeat, sports and a whole lot more in text, photographs, video, graphics and online.
 
 
 
 
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