PESO BREAKS INTO 41-TO-$1 TERRITORY / WHAT IS THE DEBT CEILING PROBLEM?

[PHOTO - THE Philippines’ benchmark stock index rose to a new record even as Wall Street struggled with the US’ debt problems. At the Philippine Stock Exchange, the composite index jumped 35.19 points, or 0.80 percent to a new high of 4,458.74, surpassing its previous record of 4,439.61 on July 5. The broader all-shares index rose by 17.73 points, or 0.58 percent to 3,093.74.]

MANILA, AUGUST 2, 2011 (STAR) By Lawrence Agcaoili - The peso climbed yesterday to its strongest level in 39 months, breaching the P41 to $1 level, as investors cheered the announcement by US President Barack Obama about the end of the debt deadlock that could have triggered a default and a downgrade of the triple A credit rating of the US.

The peso gained 21.5 centavos to P41.925 yesterday from Friday’s closing of P42.140.

The local currency hit an intra-day high of P41.90 as volume was heavy at $899.3 million from $844.87 million last Friday.

This was the highest level for the peso since closing at P41.87 on April 21, 2008.

Bangko Sentral ng Pilipinas (BSP) Governor Amando Tetangco Jr. said in an interview that the foreign exchange market would remain volatile not only because of developments in the US but in Europe as well.

“The peso has breached the 42-to-the-dollar level. It’s trading at P41.925 so it has even appreciated given the problems not only in the US but also in Europe,” Tetangco stressed.

He pointed out that the exchange rate is being affected by positive sentiments with respect to the Philippines, together with the other emerging markets, of continued economic growth that is faster than the advanced economies.

“In terms of the foreign exchange market, I think that what’s going to happen is there could be some volatility in the exchange rate. No one really knows how this problem is going to affect financial markets around the world,” he added.

The BSP chief also cited the general weakness of the US dollar leading to strong foreign capital inflows into emerging markets including the Philippines.

“Our interest rate is still higher than interest rate in advanced economies and general dollar weakness. So I think if one looks at the data we’ll see that foreign inflows, capital inflows, have continued even with this problem in the US and in Europe,” Tetangco said.

Leaders of the clashing Democrats and Republicans in the US chose to end debates that could have pushed the US Congress to a debt default. The agreement that would cut about $1 trillion in spending over the next 10 years must be ratified by both the Senate and the House of Representatives.

Tetangco added that the performance of the equities market would depend on what’s happening in the real sector profits.

“Again there may be some volatility but we don’t foresee a collapse or significant drop in either the equities or the foreign exchange market.” he said.

The Philippine Stock Exchange index (PSEi) closed at a new record level of 4,550.53 yesterday, up 46.90 points or 1.04 percent.

Year-to-date, the PSEi has gained 8.32 percent or 349.39 points.

FROM PLAN YOUR INVESTMENT ONLINE Plan Your Investment

What is US debt ceiling problem? Jul 31 2011 Posted by in World Economy

The current situation of the US government is that it has reached the maximum limit it can borrow from others. The limit is set as $14.3 trillion. According to the reports, the limit has been already reached and they have the time till August 2, 2011 to increase the limit. If the US govt. want to get more loans, first it needs to increase the debt ceiling for $14.3 trillion with approval from the parliament.

The debt ceiling was created after the World War I. This has been increased several times and it is not the first time to increase the limit. But, now the debt which US has is the highest in the history. US govt. never had this much debt in their balance sheet. It creates the problem for them to raise it again to borrow more loans.

[PHOTO - Barack Obama and John Boehner must unite the factions within the Republicans and Democrats to get a deal signed]

If the US govt. failed to complete the deal, there won’t be any money left with the US treasury to spend on the welfare schemes and pay the pension to the govt. employees. It ultimately need to cut all the expenses and stop the projects. It would drastically affect US economy and then spread to the world economy. It is expected that at least some temporary solution to be decided on the coming week. Everyone on the wall street are nervous about the situation and eagerly waiting for the positive outcome.

History of US Debts

The following picture ( source: firstpost ) explains the historical data on how the huge debt is accumulated over the years. The existing debt has been increased quickly after the 2008 financial crisis.

Deadlock with Congress

Since the current debt of the country is very high, it is also a not good idea to increase the debt ceiling without a proper strategy to cut the govt. spending and increase the taxes to reduce the debt burden in the future.

Note that, US govt. has to pay the interest for the whole debt on the specified date with bond holders. When the debt amount is getting increased, the interest outgo also will get increased. This would make the things worse if there is no significance increase in the income of the govt.

Keeping the above problems in mind, the current opposition party ( Democrats ) leader John Boehner (photo right) is not approving the Obama’s plan to pass the debt ceiling bill.

It needs to get the approval in the Congress.

As of writing this article, till there is deadlock over the issue and no significance progress. If the ruling govt. increases the limit without approval from the opposition party, it would become problem for Obama’s administration. (Read: Fed Readies Guidance for Banks in Case Aug. 2 Debt-Ceiling Deadline Missed)

 

Gold rush and US debt rating

If you look into the recent rally on the gold prices, it is mounting the all time high of $1,637.50 an ounce. The investors are worried about the future of dollar and want to park their money in the safest place. There are no other best alternative for the dollar (few investors buying into Japan’s Yen) then Gold. The gold rally will continue for the next couple of years till the issue on US debt and Euro zone problems are solved. But, the current level on Gold is at all time high, investors should be careful on investing on the gold.

Every govt. has its rating for their debts. For example, when US govt. needs to borrow money from other countries, they will issue the bonds of short term and long term. This bonds will carry the interest rates associated with it. China has bought more than $750 billion worth of US bonds. It means that China is the largest lender for US govt. as of now. The second largest lender is Japan. US govt. needs to repay the loan on the maturity of the bonds and have to give the interest amount on specified date. If the repay capacity of the loan become difficult for the borrower, in this case its US govt., the rating agencies will cut the rating. Currently countries like USA has the top rating of AAA.

[The picture at right (Source: NY Times ) explains the creditors who has contributed the debt.] 

If the rating is downgraded, it would increase the interest rates on the bond prices and getting more money would be costlier for the governments.

Global Impact

Any bad news from the western countries, directly impact all the countries because most of the countries heavily depend on the US for import and export. For instance, China is the largest exporter for US. If any slow down on the economy would directly impact the China’s exports and it would collapse their GDP growth.

US consumers has the highest spending habits, there are no other country to replace the USA at any time. So, the impact can not be avoided and every one has to go through the tough times ahead.

Summary

The above sections explained the real scenario of the US debt problem and its consequences. If the result is negative, it would shake the global economy and would lead to another recession. This time it will be bigger than the 2008 crisis.

We have to wait and watch for the proceedings. I will come up with few more articles on the burning global issues. If you have any ideas, please post it in the comments section. Please subscribe to our future articles here.

FOM BBC NEWS

US parties hopeful of debt limit deal as deadline looms 31 July 11 14:45 ET

[THE WASHINGTON MONUMENT IS SEEN BEHIND THE WHITE HOUSE IN WASHINGTON, DC]

US political rivals are cautiously optimistic about the chances of raising the $14.3tn (£8.7tn) debt limit by Tuesday and averting possible default.

Republican Senate leader Mitch McConnell said the sides were "very close" to a $3tn deal after talks with Vice-President Joe Biden.

Senior Senate Democrat Richard Durbin spoke of "a more positive feeling".

But both the Democrats and the Obama administration warned that the details had still to be agreed.

America limits by law the total amount of debt its government can run up in order to pay its bills, and the Obama administration is under mounting financial pressure.

According to the Associated Press news agency, a compromise plan now emerging would increase the debt limit in return for spending cuts of about $1tn initially.

A joint committee of members of Congress would then decide a larger package of cuts as the price for a second raise in the limit after next year's presidential election.

Battle of the bills

In a sign of the level of anxiety over the issue, troops in Afghanistan asked Adm Mike Mullen if they would be paid.

The admiral, who as chairman of the joint chiefs of staff is on a visit to southern Afghanistan, said he could not tell if the US failed to raise the debt limit.

"We have to get this solved," White House senior adviser David Plouffe told NBC television on Sunday. "Today is obviously a critical day."

Democratic Senator Chuck Schumer said many issues still needed to be settled, although there was "relief" in Congress and the White House because serious negotiations were now making headway.

Democrats and Republicans have so far rejected each others' proposals in the two houses of the divided US Congress.

On Sunday, the negotiations appeared to move on a step when the Democrat-dominated Senate narrowly rejected the debt ceiling bill proposed by the Democratic Senate Majority Leader, Harry Reid, and backed by President Barack Obama.

The bill would have cut $2.2tn from deficits and raised the debt ceiling by $2.7tn, meaning the issue would not have to be revisited until after the 2012 elections.

But its defeat paves the way for a cross-party bill which will probably feature elements of the Reid plan, analysts say.

"The arrangement that is being worked on with the Republican leader and the administration and others is not there yet," Mr Reid said on the Senate floor after the vote.

"We're hopeful and confident it can be done."

The Republican-held House of Representatives rejected the Reid bill 246-173 on Saturday afternoon.

House Republicans had passed their own plan, drawn up by speaker John Boehner, to make some $900bn in spending cuts and raise the debt ceiling by a similar amount.

But the Boehner plan would require another vote next year, in the midst of the presidential election campaign, and proposes a so-called "balanced budget amendment" to the US constitution.

The White House and the Senate leadership are opposed to both of these proposals, and the Boehner plan was rejected, in turn, by the Senate.

'Fully engaged'

Speaking on CNN on Sunday, Mr McConnell said negotiators were "very close" to striking a deal.

He earlier called on Democrats to end their "charade" so that negotiations could be pursued with the president.

"We are now fully engaged with the one person in America out of 307 million people who can sign this bill into law," he said before his talks with Mr Biden.

Mr Obama himself has reiterated that any solution must be bipartisan.

"Congress must find common ground on a plan that can get support from both parties in the House and in the Senate, and it has to be a plan that I can sign by Tuesday," he said.

Meanwhile, the US Treasury is already drawing up emergency plans in case a deal is not reached by Tuesday.

Experts say the government has enough cash to keep functioning for another week or so after that.


Chief News Editor: Sol Jose Vanzi

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