US' debt pangs

If you borrow money, you must pay it back — on time. This is especially true of inveterate borrowers, be they individuals, groups or countries. Oftentimes, it becomes necessary to borrow afresh to repay old loans. After its banking system collapsed in 2008, the US had to flush the economy with cash to keep the boat afloat. This was done by the US government which borrowed several trillion dollars. But even that did not prove enough. So it needed to borrow more. But politicians will be politicians and the Republicans, who are in the Opposition now and whose foolish economic policies caused the problem in the first place, decided to show the US President, Mr Barack Obama, their power. They refused to raise the government's borrowing limit. A great deal of political haggling over more taxes and less spending ensued. The government tried to frighten everyone by saying the US would default. The markets' palms became wet with nervousness. China, which has the most to lose, said don't be silly, it won't. Other emerging markets quietly exchanged glances of schadenfreude . But the US is not the PIGS and, in the end, the American politicians, perhaps because the August vacation is sacrosanct, worked out an arrangement at the last minute. No one really understands how the government can reduce the deficit by $2,800 billion over the next decade, in return for which its debt ceiling has been raised by around $3 trillion dollars.

So President Obama has got what he wants now, in return for a future promise which some other President will have to keep. The markets stopped biting their lips and got back to their usual betting. The S&P 500 futures went up by 1.2 per cent as did the dollar, by about 1 per cent against both the yen and the Swiss franc, and gold went down a slightly. As deals go, this is about as sweet as it gets. No such problem will crop up during his term. So Mr Obama is home and dry on this one. To be sure, the new arrangement still has to get the approval of the Senate; the House of Representatives has already cleared it. No one really had any doubts that the US would default. But the crisis does underline the continuing fragility of the US economy. So severe has been the banking crisis of 2008 that it could take another five years to work itself out. Overall, this means that global growth will be slower than what it would otherwise have been. This should come as a relief to India whose growth depends on its domestic market but needs its imports, especially of crude oil and gas, to be cheap.

Unfortunately, the Prime Minister, Dr Manmohan Singh, thanks to his curious leadership style, is not in a position to take advantage of this serendipitous hiatus in global economic activity. India needs more reform now, but for the next three years, it is stuck with this paralysed government.

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