US budget gridlock.

21st November 2011

Ian Copelin, Investment Director, my wealth, comments “Having fallen every day last week, as surging borrowing costs for Italy and Spain heightened concern that the debt crisis in Europe is spreading, the FTSE-100 is down again this morning.  The FTSE-100 is currently down 100 points or 1.86% on the day at 5,263.

The European debt crisis has toppled its fifth elected government over the weekend.  However, unlike Greece and Italy, which fell without a public vote, Spain elected the People’s Party, led by Mariano Rajoy, who won the biggest parliamentary majority in a Spanish election in 29 years.

In the US, the bipartisan Congressional super-committee have a deadline of Wednesday 23 November to pass legislation on a US$1.2 trillion deficit reduction.  The market appears focused on the Wednesday deadline (however, the Wednesday deadline is for getting legislation out of committee and under panel rules a draft of the legislation must be publicly available 48 hours beforehand – i.e. today).  At present, Republicans and Democrats appear to be making little progress (Democrats are seeking tax increases on high earners, while Republicans are pushing to extend President George W. Bush’s tax cuts and want cuts in the Democrats Medicare entitlement program) and if Wednesday’s legislative deadline is not met, then the earlier enacted automatic spending cuts (which falls equally on domestic and military programs), will take place.

However, of greater significance is the message that this will give the markets – a failure to agree budget cuts will highlight the vacuum at the top of US politics and could point to more stalemate for another 12 months until the next US presidential election on 6 November 2012.  This could prompt a further downgrade of US debt from either Moody’s or Fitch who still have the US on a AAA credit rating, given that S&P reasoned that its credit downgrade in August was due to the political inability to get anything done and the soaring debt burden.”