Last Updated: Sun Jul 31, 2011 17:28 pm (KSA) 14:28 pm (GMT)

Eman El-Shenawi: America debt crisis: Listen to the ticking clock, how it thuds

Eman El-Shenawi

The theme tune to “It’s the final countdown” would be most fitting here, in the most satirical understanding of America’s financial bearings.

In the 11th hour conundrum of last-minute deficit talks to salvage an economy, we await a decision. Welcome to the America’s ticking clock.

The aim: To get the debt ceiling raised. To establish a deficit reduction plan. The deadline: Tuesday, August 2. The risk: America running short of money to pay its bills. The deal: Keep hedging your bets, it’s still under construction.

Republicans and Democrats have been deadlocked over contending plans to curb the national debt. Typically, such a deal should focus on tax hikes and spending cuts, however both parties have mismatched views on which tax raises and cuts should be pushed forward, which conventionally stem from mismatched politics.

The United States public debt is $14.3 trillion, up from $10.6 trillion when President Barack Obama took office in January 2009. The government currently has a $1.5 trillion budget deficit, with the US running the risk of defaulting on its debts in two more days, when the current federal budget runs dry.

Deal proposals have come and gone. Two weeks ago, Democrats targeted tax breaks that benefit specific industries or taxpayers totaling about $400 billion in savings. This was part of a package of spending cuts and new tax measures drawn up by President Obama to reduce the debt by $4 trillion over 10 years.

But Republicans were determined to prevent any tax increases and wanted to see tough measures to reduce the deficit in exchange for agreeing to raise the debt ceiling.

The US hit its debt ceiling in mid-May and in order to create room for the government to continue borrowing and balance its social spending it should raise the debt limit. And to sum up, congress has to agree to raise the debt ceiling by August 2, otherwise the “running out of money” scenario will happen.

Congress negotiations are now shakier than ever. If one likens it to a film, it’s the disruption that consequentially happens before the narrative can eventually end and return to equilibrium. Or more simply, the nervous murmurs heard from Capitol Hill can be likened more to a thwarting last minute action movie mess, which needs to be resolved while the bomb is ticking. In this case, it’s the red wire or the blue.

Who will make the most compromise on a required bipartisan deal?

The latest developments have been grim. Hopes on early Sunday had been that Senate Majority Leader Harry Reid’s debt plan would have been agreed on. But the house voted down the measure to lift the debt limit by $2.4 trillion and cut spending by $1.2 trillion over a decade. If passed, the legislation would have brought a compromise measure to the Senate floor if a compromise was hammered out with Senate Republican Leader Mitch McConnell, the White House and the House leadership. More stubborn, political gridlock in the world’s richest economy, with a gross domestic product of $14.12 trillion.

Meanwhile, other media reports suggest that the United States is actually near a deal, citing more confident Congress behind-the-scenes talk.

“We’re a long way from any kind of a negotiated agreement,” Senator Richard Durbin, the No. 2 Democrat in the Senate, told reporters late on Saturday, “but there is certainly a more positive feeling about reaching an agreement this evening than I’ve felt in a long time.”

Either way, the debt commotion continues to shake America’s global allies. A debt default would cause the crash of the dollar - the world’s prime reserve currency – and hinder also America’s economic influence. Holders of US Treasuries are the most concerned, particularly those with gulf currency pegs; a double blow in the event of a default. Gulf Arab states are a prime example, as major holders of US Treasuries and their currencies are mostly dollar-pegged, while oil - their main source of revenue - is priced in dollars, too. Gulf states typically do not usually disclose the composition of their foreign currency reserves, but Qatar for example (the fastest growing economy in the Gulf) held foreign reserves worth 70.5 billion riyals ($19.4 billion) at the end of May or 19 percent of the country’s economy, the latest central bank data showed.

Meanwhile, the United Arab Emirates Central Bank announced on Saturday (in a bid to lull public fears) that it was not presently holding any US treasury bonds or any other financial instruments issued by the US government “due to the very low return on holding such instruments,” the bank said in a note.

But the dirham, the country’s currency, is pegged to the sinking dollar, which has fallen against the pound, yen, and to a record-low against the Swiss franc at 0.7853 francs during the debt chaos. And yes, the UAE remains worried about fuelling domestic inflation because of the dollar peg that is clasped firmly around the dirham’s neck.

While they cannot de-peg abruptly in response to the debt saga, analysts suggest that countries holding US Treasuries also would not choose to shift reserves.

“I would assume there would be no major shift in reserves in the Gulf at this time,” Giyas Gokkent, chief economist at the National Bank of Abu Dhabi told Reuters.

“It simply cannot be the case that suddenly central banks start switching and move to other currencies as reserves. The question is, even if you want to switch, what do you switch to?”

Or more plainly, a world that bows down to the dollar, will not give up on it so easily in its current mess. They await equilibrium to return; for the frantic mess to meet a calmer resolve, for time to slow and the clock to beat steady.

Eman El-Shenawi, Columnist at Al Arabiya English, can be reached at: eman.elshenawi@mbc.net.

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