Monday, 25 July 2011

US debt ceiling unresolved on deficit deadlock

This will keep markets nervous today. From Reuters:

Lawmakers failed to achieve a budget breakthrough and instead worked on rival plans Sunday in a impasse that heightened prospects for a catastrophic debt fault.

With time running out, Republican and Democratic lawmakers split into opposite camps and held talks among themselves. There were no signs of a deal emerging to head off a default in nine days that could trigger global economic calamity and downgrade America's Triple-A credit rating.

Lawmakers missed a self-imposed deadline of producing a deficit-reduction deal by the time Asian markets opened on Sunday, but planned to outline a proposal Monday. A deficit deal is needed to permit a vote to increase the $14.3 trillion U.S. debt ceiling by August 2.

PIMCO's Mohamed A. El-Erian thinks that even a deal may not be enough to completely satisfy markets. From Bloomberg:

“In most likelihood, a last-minute political compromise will avoid a default but will leave the AAA rating extremely vulnerable,” El-Erian, the Newport Beach, California-based chief executive officer and co-chief investment officer at Pimco, wrote in an e-mail. “Stock markets around the globe will look to price in a greater uncertainty premium on account of political squabbles in the world’s largest economy and the increasing risk that it may lose its sacred AAA rating.”

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