World heaves sigh of relief as US barely averts debt default Last-Min Deal Raises Limit On Govt Borrowing

Washington: The United States seems intent on proving the Churchillian assessment that one can always "count on the Americans to do the right thing—after they have exhausted all the other possibilities". After skating on thin ice at the edge of a fiscal cliff, senior US lawmakers and their aides worked through the night on Tuesday to avert a debt default that could have 

catastrophic consequences for the world economy and global finance. It is not a done deal yet, but the US Senate, a more deliberative body than the raucous House of Representatives, showed resolve and purpose in arriving at an agreement that will, at least temporarily, forestall what was being called afinancial Armageddon. 
    Under the still sketchy terms of the deal reached between Senate Republicans and Democrats, who are typically mellow compared to flinty House members, the debt ceiling will be raised till February 7. GOOD NEWS FOR MARKETS, DOLLAR MAY GAIN 
THE GENESIS 
The US govt, like most govts, spends more than it earns. Tax revenues cover only 84% of its total expenditure. It borrows the rest by floating sovereign bonds or Treasury bills, on which it pays interest. In $ terms, the US govt has the highest borrowings in the world. But because its bonds are considered extremely safe (and the $ enjoys the status of the world's 'reserve currency'), they attract investments from everywhere, including China THE POLITICS | The Senate and House of Representatives set a ceiling on how much the US govt can borrow. Once it hits that ceiling – $16.7tn at the moment — it needs their clearance to borrow more 
THE PRECIPICE 
Republicans, who control the House of Reps, were threatening to block raising of the debt limit unless Obama's healthcare reform plan was repealed. The govt had said it would run out of money on October 17 DANGER OF DEFAULT 
If Republicans had refused to raise the debt limit, the govt would not have money to pay bondholders their interest – which would have put it in default for the first time ever. This would have had a catastrophic effect on the US and world economy and markets 
WHAT THE DEAL MEANS 
It extends US borrowing authority till Feb 7, 2014. The Treasury will have tools to temporarily extend its borrowing capacity beyond that date if Congress fails to act early next year. 
Global stockmarkets should rise 
INDIA IMPACT | Stockmarket likely to open higher but rupee may weaken as dollar strengthens against other currencies. Good news for companies linked to US govt orders Debt deal: Republicans gain little for risking US credibility 
    The partial shutdown of government will end with pared down funding till January 15, with previously agreed spending cuts to be implemented. Republicans may also get some minor concessions in implementation of the so-called Obamacare, the new healthcare law that is the cause of ultraconservative heartburn and the reason why right-wing lawmakers (dubbed the American Taliban by former Congressman Bill Richardson) had held the US government hostage. 
    The mechanics of how all this will be effected before the Wednesday midnight deadline, when the US government will run out of borrowing authority, is unclear, but the world heaved a sigh of relief that some resolution, even if it is a temporary fix, is in the works. The Senate is expected to send its agreement, codified into law, to the House, where Speaker John Boehner will put it up for vote even in the face of a possible revolt from the Tea Party wing of the Republican Party. 
    Because it is a Senate Democrat+Republican compromise, House Democrats and moderate Republicans are expected to vote for it and pass it easily. Boehner was unable to convince his disparate flock, insistent on an agreement on their terms, to back his own conciliatory plan to avert the crisis, but he is expected to back the compromise reached between Senate majority leader Harry Reid and Senate opposition (minority) leader Mitch McConnell. 
    The reason the Senate maybe able to pull off what the House cannot is because, among other things, it is a less partisan body whose members (two per state) have a broader outlook. They go to the polls once every six years (unlike House members who have two yearterms) and are typically under less political and constituent pressure. The Senate, currently under Democratic control, is also more collegial, making compromises more palatable than in the House, which has become toxic with extreme views on various issues. Although it was the Senate's ultraconservative Republican Ted Cruz who precipitated the crisis, the overwhelming support the agreement got from the chamber has forced him to stand down—for now—although he railed against what he saw as a Republican leadership sellout. 
    While the temporary fix suggests the two sides are merely kicking the problem down the road and they have to deal with it again early next year, part of the deal enjoins them to complete work on a detailed budget plan for the next decade by December 13. This exercise may end the tortured existence of successive presidents who, because of the way the country's founding fathers structured the balance of power, have to necessarily negotiate with Congress, which controls the purse strings of the government. When Congress is won by a party different from the one that takes the White House—as it happens often in recent years including now when Republicans control the House of Representatives-—this process becomes excruciating, although few Presidents have been as harassed as Barack Obama. 
    At the end of the day though, hardline Republicans have suffered a crushing defeat, getting little in return for putting US prestige and credibility at stake. Although the most red-blooded of Tea Party legislators are in safe seats, polls show their intransigence may have endangered Republican control of the House come midterm Congressional elections in November 2014. "It's very, very serious,'' Senator John McCain, Republican of Arizona was quoted as saying about the crisis in the party. "Republicans have to understand we have lost this battle, as I predicted weeks ago, that we would not be able to win because we were demanding something that was not achievable." 
'CREDITWORTHINESS IS LIKE VIRGINITY... IT CAN BE PRESERVED BUT NOT RESTORED' 
Omaha: Billionaire Warren Buffett says it would be idiocy for the nation's leaders to allow the United States to default on its bills. Buffett is a renowned investor who leads the Berkshire Hathaway conglomerate. Buffett says he doesn't think the federal government will fail to pay its bills. "It would be a colossal readjustment of the world if people lost 
    faith in the United States government to fulfill its obligations," he said. "To even play around with the idea is just totally irresponsible, and I think it should be banned from the arsenal of both parties." "Creditworthiness is like virginity," he added. "It can be preserved but not restored very easily." Buffett says he hasn't changed Berkshire's spending because of the budget battle. And he hasn't yet seen an effect on consumer spending. AP