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October 18, 2013

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Relief across the board as US impasse finally ends

Source: Agencies | October 18, 2013, Friday | Print Edition

Political leaders, investors and ordinary people yesterday welcomed the end of a US government shutdown but were already looking ahead to the next round of a budget battle that brought the world’s biggest economy close to default and threatens Washington’s international standing.

The deal approved late on Wednesday by Congress, with hours to go before the government reached its US$16.7 trillion debt limit, only permits the Treasury to borrow through February 7 and fund government through January 15. The International Monetary Fund appealed to Washington for more stable long-term management of the nation’s finances.

The standoff rattled global markets and threatened the image of US Treasury debt as a risk-free place for governments and investors to store trillions of dollars in reserve. Few expected a default but some investors sold Treasurys over concern about possible payment delays and put off buying stocks that might be exposed to an American economic downturn.

IMF Managing Director Christine Lagarde welcomed the deal but said the shaky American economy needs more stable long-term finances. “It will be essential to reduce uncertainty surrounding the conduct of fiscal policy by raising the debt limit in a more durable manner,” she said in a statement.

But relief might be only temporary without a long-term settlement, said Standard Chartered economist Samiran Chakraborty in Mumbai. “In three months’ time, this could be back again,” said Chakraborty. “If this kind of pushing it back happens several times, then this comfort that the markets had over the last 20 days that a deal will be reached, that comfort may now be dead.”

Big Asian exporters including China and South Korea also faced the risk of a slump in global demand if a US default had disrupted other economies.

China’s government, Washington’s biggest foreign creditor with US$1.3 trillion invested in Treasurys, welcomed the end to the standoff. “This issue concerns many countries in the world,” foreign ministry spokeswoman Hua Chunyin told a regular briefing. “The United States is the biggest economy in the world. For them to handle the issue properly is to their own interest and beneficial to their own development. We welcome their decision.”

Xinhua news agency issued a scathing commentary accusing American leaders of failing to address chronic budget deficits. It said their deal only makes “the fuse of the US debt bomb one inch longer.”

“Politicians in Washington have done nothing substantial but postpone once again the final bankruptcy of global confidence in the US financial system and the intactness of dollar investment,” the commentary said.

Chen Ju, an employee at a Shanghai fast food company, said she sold stocks when she heard the US government shutdown. She said she was ready to get back into the market but would look for safety. “I just think the US is crafty. They released all kinds of information. It made me confused about what was true or not,” said Chen.

 

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