US debt crisis risks gulf investment entities

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US debt crisis risks gulf investment entities

Objective

Analysis of the depth of the crisis

A sharply divided US Congress over budget plans is giving headaches to gulf investment entities who have invested an estimated $1 trillion (Dh3.67 trillion) in US Treasury notes and bonds.

President Barack Obama’s Democrats and their Republican rivals were deadlocked over budget plans to raise the debt ceiling with barely a week before the August 2 deadline. Obama rejected a Republican proposal for a temporary increase in the debt limit, arguing that it would leave the underlying problem unresolved and lead to a repeat of the current crisis in just six months time.

Democratic Senator Harry Reid aimed to raise the debt ceiling by $2.7 trillion, which is sufficient enough to cover the countrys borrowing needs through the November 2012 elections. This would be paired with an equal amount in spending cuts over 10 years in deficit savings to keep debt at a sustainable level.

Republican House Speaker John Boehners plan was to raise the debt limit in stages. His plan could potentially deliver bigger budget savings through an overhaul of the tax reforms and healthcare reforms, which are expected to become inflated in the coming years.

With no compromise in sight the IMF chief Christine Lagrade urged for a resolution of the political impasse in Washington, warning that failure to reach an agreement would have serious impact on the world economy.

Ripples

Any failure by the US Congress to reach a deal will make Gulf Cooperation Council (GCC) nations rethink of pegging their currencies to the sinking dollar. If the lawmakers in the US dont find a solution to this brinkmanship, the effect on the Gulf will be very significant, said John Sfakianakis, chief economist at Banque Saudi Franci. The Saudi central bank alone holds $497 billion in US notes.

The dollar fell across the board, hitting a record low against the safe-haven Swiss franc

The major stock exchanges across Asia and Europe fell sharply, while gold was pushed up to a record high. The Wall Street opened lower and investors have become more defensive on the prospect of a first-ever US debt default, which Fed Chairman Ben Bernanke said would be a calamitous outcome for the US and the global economy. However, financial markets are not showing any sign of panic as feared, though it is too early to rule out if the debt situation arises.

The Dow Jones industrial average, the Standard & Poors 500 Index and the Nasdaq Composite Index were all down less than 1 per cent in early trading.

Overview

With an August 2 deadline the Democrats and Republicans split into two camps to work on their own proposals. President Barack Obama warned of a deep economic crisis if the US fails to raise its debt limit and urged Americans to pressure Republican lawmakers to compromise to avert a default.

Any failure by the US Congress to reach a deal will make Gulf Cooperation Council (GCC) nations rethink of pegging their currencies to the sinking dollar.

Sources: Gulf News, Zawya, Times of India

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