More traders and investors (in the USA and around the globe) start feeling nervous about the “fiscal cliff” issue. The US authorities failed to resolve it in late December 2012, thereby postponing it for a couple of months. Institutional traders and investors prefer to stay away from the market while small-scale market participants keep maintaining their traders while waiting for the “judgment day”.
As you know, the negative scenario implies further strengthening of the US Dollar attended by lower bond yields, higher spreads in the corporate sector and lower oil prices.
What are the real threats of the “fiscal cliff”?
Ben Bernanke Urges US Congress to Raise Debt Ceiling
During his latest speech in the University of Michigan, Ben Bernanke, Chairman of the Federal Reserve, urged the US Congress to raise the US debt ceiling as soon as possible. In late 2012, the ceiling was around $16400bn.
August 2012 was the last time the ceiling was eventually raised after continued talks between Obama’s administration and the Congress. However, everything changes. What seemed to be a great achievement now can provoke another major crisis, which is quite logical. While the debt ceiling remains unchanged, the US department of the Treasury cannot borrow any more money. If this is the case, the USA will eventually fail to service its public debt.
The US department of the Treasury is now forced to do everything to stay solvent. The Secretary to the Treasury hopes to hold out till spring.
The Press Secretary of the Fed says that some politicians misinterpret the debt ceiling. For example, the Republicans say that higher debt ceiling leads to higher public spending. Ben Bernanke opposes by saying that it is nothing but a chance given to the US government so that they could service the public debt properly.
Ben Bernanke compares the Congress’s reluctance to raise the debt ceiling with a family of lousy debtors who think that they will be able to improve their financial wellbeing by not paying the current bills.
Higher debt ceiling will allow the government to pay the existing bills without expanding the budget deficit.
Obviously, there is nothing pleasant in debts and budget deficits. Still the Chairman believes that the solution lies in finding a balance between profits and expenses.
Expert Opinion: Fiscal Cliff Is Not the End of the World
According to Eugene Olkhovsky, ’s leading expert in financial markets, the fiscal cliff is a rapid policy change which implies a shift from fiscal stimulation towards spending cuts and tax hikes in order to reduce the county’s budget deficit and public debt.
The fiscal cliff 2013 implies tax hikes by $400bn and spending cuts by $200bn. In general, the measures are expected to allocate decent funds equal to 5% of the GDP.
The latest fiscal cliff took place in the USA in 1968-1969 when a 5% GDP increase in 1968 was followed by a 3% decline in 1969.
Western experts say there is little chance that the fiscal cliff scenario will eventually manifest itself. They say it such a scenario may result in serious negative consequences for the party responsible for that.
The most likely scenario implies another delay till mid 2013.
EURUSD Prospects
On the one hand, further weakening of the US Dollar seems inevitable as the global economy seems to be recovering and investors are getting more confident. In this aspect, the US Dollar and other conventional safe-haven assets become less popular, experts assume.
Obviously, everything is far more complicated. Expectations of a compromise between the Democrats and the Republicans keep pushing S&P 500 up. Over the recent months, the index has gained 5.2%.
On the other hand, the 10-year US bond yield is recovering from the record low around 1.36%. Now it is 1.76%. Further growth is expected in the near future as the US bond market keeps losing its attractiveness for safe-haven seekers.
