Even though America has managed to avert the imminent threat of a federal default, the last will probably not be heard about this. All that the US Congress did on Wednesday was approve a proposal extending the Treasury Department’s authority to borrow until February 7, 2014. Without a last-minute deal between the ruling Democrats and a section of the Republican Opposition, the existing debt limit of $16.7 trillion would have been exhausted, leaving the Treasury with cash balances of $30 billion or so, barely sufficient to meet a week’s expenditure commitments. Had the US defaulted on its obligations, it would not only have been unprecedented but would have had huge global ramifications. The dollar is, after all, the world’s reserve currency — just as ‘risk-free’ US Treasury bonds are the benchmark over which yield spreads of debt securities issued by other sovereign and corporate entities are determined.
The end of the current impasse — which saw a 16-day partial government shutdown — is a victory of sorts for President Barack Obama. The Republicans, led by an ultra-conservative Tea Party faction, had sought to link authorisation of any further increase in the federal debt ceiling to a virtual rollback of Obama’s pet Affordable Care Act. But with the President refusing to budge beyond granting a few minor concessions such as tightening income verification rules for purchase of subsidised health insurance, the Republicans were forced to throw in the towel. They probably had no other option, given that their recalcitrance, which was perceived as damaging to the country’s global image, had resulted in plunging poll ratings.
While the Republicans may have lost out on ‘Obamacare’, their advocacy of a minimalist government could well become louder as the next debt ceiling deadline approaches. Between 2007 and 2012, US public debt has almost doubled to over 70 per cent of GDP; annual budget deficits have swelled from 1.1 to 6.8 per cent of GDP. These imbalances will, sooner or later, have to be addressed. If the Republicans have their way, this will come mainly through spending cuts and the rationalisation of entitlement programmes. To the extent that such fiscal austerity is a drag on a nascent economic recovery, the US Federal Reserve may be persuaded to go slow on winding down its massive monetary stimulus programme. That, of course, will be good for India and other emerging economies, which have suffered from capital outflows triggered by expectations of an imminent tapering of ‘quantitative easing’ by the Fed.