March 8, 2021

Relief and Dismay Greet Budget Deal Worldwide

Political leaders, economists and other financial analysts outside the United States expressed relief at a likely debt deal, but the big takeaway for many was that a minority in Congress could threaten the global financial system. The realization prompted some foreign observers to question the integrity not only of Treasury bills but even of American democracy.

“People are surprised to how close we came to a train wreck,” said Pankaj Ghemawat, a professor at IESE Business School in Barcelona who is author of a newly published book on globalization. “It doesn’t inspire confidence in what else might be coming down the tracks.”

Asian markets rallied on reports that President Barack Obama and congressional leaders had reached a budget deal, though it still required approval by lawmakers. But in Europe, major indexes ended the day lower, reflecting drops in U.S. stocks and anxiety that the budget agreement is an ugly compromise that will undercut the American economy. Weak manufacturing data also hurt stocks.

“The ideological rigidity that has gained ground in both parties, and the hardening of party lines, has never before existed in this form,” the conservative Frankfurter Allgemeine newspaper in Germany said on Monday in a front-page commentary on U.S. politics. “Not without reason, the functionality of the political system has been called into question.”

One lesson for foreign investors was that no government’s debt, not even once-sacred U.S. bonds, is any longer immune to risk. That was a particularly unsettling message in Europe, which already has a massive debt problem of its own.

Generations of economists and investors have been taught that U.S. bonds were the closest thing to a bulletproof investment, an assumption that has been shaken. In the days leading up to the agreement in Washington, there was even fear of a renewed financial calamity if America defaulted.

“It is important that the U.S. continues to be the global gold standard with regard to creditworthiness and the validity of its debt,” Mark Schneider, chief executive of the German health care company Fresenius, said Monday in an e-mail. That, he said, is “simply one of the cornerstones of global finance today.”

Benchmark stock indexes in Japan, Hong Kong and South Korea rose Monday as the deal was announced by Mr. Obama, while the dollar gained against the yen, which was good news for Japan. The U.S. debt troubles undermined the dollar’s value in currency markets in recent weeks — a worrying trend for Japanese exporters, as a stronger yen makes Japanese goods more expensive for shoppers overseas.

Expressing a general sense of guarded optimism about the debt deal, Yukio Edano, the Japanese chief cabinet secretary, said, “We welcome the deal, which we hope will lead to market stability.”

His sentiments were echoed by leaders in Europe.

“We strongly welcome that there has been an agreement,” a German government spokesman, Christoph Steegmans, said in Berlin, Bloomberg reported.

But there was also dismay that the deal did not seem to address the U.S. government’s underlying fiscal problems.

“The U.S. saved from default by a fragile, modest and temporary accord,” read a headline in the French newspaper Le Monde on Monday.

On the contrary, there was fear that the agreement might set the stage for further disruptive spending battles in years to come. “The Republicans have tasted blood,” said Mr. Ghemawat, a U.S. citizen who previously taught for two decades at Harvard University. “It makes them even more inclined to play tough the next time around.”

Another concern was that the deal, as outlined by Mr. Obama, might not be enough to stave off a downgrade from one or more of the major ratings agencies. The debt-ceiling debate “has made people realize just how much there is left to do on the fiscal front,” said David Carbon, an economist at DBS Bank in Singapore.

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