September 17, 2019

Even With Fiscal Agreement, Investors Facing Imminent Obstacles

“We could see an early lift in the markets because of relief the deal went through,” said Gary Thayer, the chief macro strategist at Wells Fargo Advisors. “The response may be muted because the deal left out many long-term issues.”

Market strategists were forecasting that even the deal approved by the Senate early Tuesday and by the House late Tuesday  night would reduce economic growth by as much as 1 percent in the first quarter of 2013. Much of this would come from a rise in payroll taxes on incomes under $113,700 that would affect about 77 percent of American households.

Then there are the fiscal disagreements that Congress did not try to address in its negotiations this week. Spending cuts of $110 billion were delayed for two months, and politicians have not come up with a long-term solution that would allow the government to get past the borrowing limits reached at the end of the year — known as the debt ceiling.

“We keep stumbling from patchwork solution to patchwork solution, without getting us to the longer term solutions we need,” said Michael Gapen, the head of economic research for the United States at Barclays.

Technically, the country went over the so-called fiscal cliff on Tuesday, when markets were closed for the holiday. But the compromise reached later Tuesday should retroactively cancel the tax increases that began.

American stock indexes saw their biggest jump in over a month on Monday in anticipation of a deal moving swiftly through Congress. In early trading on Wednesday, leading indexes rose 2.6 percent in Hong Kong and 1.2 percent in Australia.

“If Congress just comes close to their most modest expectations, investors tend to cheer that,” said Ed Yardeni, the founder of Yardeni Research. “A lot of investors are suffering from battered investor syndrome.”

Many economists say that if politicians are ultimately able to reach a more lasting budget agreement, it could allow the focus to turn to signs of improvement in both the United States and global economies. Asian markets have been propelled higher in recent days by data showing that China’s manufacturing sector was continuing to expand. In the United States, housing prices have been moving higher and unemployment rates lower.

This has led many economists to forecast stronger growth for the second half of 2013 — around 2.5 percent — but only after the weight of the tax increases and budgetary debates are out of the way. In the last few weeks, signs of economic strength have allowed investors to respond with a bit of a shrug to the impasse in Washington. The benchmark Standard Poor’s 500-stock index ended the month of December up, and finished the year 13.4 percent higher.

Many investors are also likely to be happy with the portions of the Congressional agreement that deal with tax rates on dividends, which are now set to rise to 20 percent from 15 percent, less than President Obama had proposed. This could produce some demand for dividend-paying stocks, particularly given then the rates will be put in place permanently.

Congress also surprised some economists by agreeing to extend unemployment benefits for more than 2 million people, and by making changes to the Alternative Minimum Tax that will avert higher tax bills for middle-income households.

But, as expected, Congress decided to allow the payroll tax to rise 6.2 percent from 4.2 percent. That is likely to immediately crimp the spending power of American consumers, and take about $120 billion out of the economy in 2013.

In the longer term, investor uncertainty heading into the new year underscored the degree to which Wall Street has become consumed by a seemingly never ending series of battles in Washington, in which one budget dispute bleeds into another.

The most severe crisis came in the summer of 2011, the last time the government reached its borrowing limit. Congress ultimately came up with a solution that allowed the government to continue taking on more debt, but only by pushing off the hardest decisions to the end of 2012. The Senate and House votes on Tuesday night put off many of those same decisions until March. At that point, the Treasury Department says it will no longer be able to use extraordinary measures to borrow enough money to operate the government.

The compromise this week also delayed $110 billion in cuts to the defense budget and other government programs until March. If there is no further agreement at that point, those cuts will begin to be phased in, amounting to another hit to the economy.

Even if the debt ceiling and budget cuts are resolved in March, politicians could put off again any long-term answer to the ballooning government deficit and debt problems that are most worrisome to many economists.  

“The markets are very quickly going to appreciate that this does not remove this cloud of fiscal uncertainty, it just briefly defers it,” said Ian Shepherdson, the chief economist at Pantheon Macroeconomic Advisors. “I can see no reason that debate should be less divisive than the debate we’ve just had.”


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News Analysis: Deal for Greek Aid Leaves Questions Unanswered

WHILE finance ministers from the euro zone and the International Monetary Fund bridged their main differences over a bailout for Greece early Tuesday, bringing closer the release of long-delayed emergency aid, what they left undecided means this long-running drama — and the cohesion of the euro union — is far from settled.

The deal allows Greece to avoid an imminent default on its debts and diminishes the prospect of a Greek exit from the euro union. But analysts said Greece could still be forced to drop the euro, largely because the agreement does little to revive the country’s stricken economy or wean its government from the need for outside financial aid.

Markets reacted positively to the deal on Tuesday. But analysts said the outcome of three stormy late-night meetings in the last three weeks was a weak compromise.

Even Christine Lagarde, the managing director of the I.M.F., appeared hesitant about the deal during a news conference early Tuesday.

“How solid is it?” Ms. Lagarde said. She questioned whether the ambitious debt-reduction goals set for Greece in the next eight years could be enforced. But she insisted that she was satisfied with the outcome and that those goals could be met.

She warned Greece’s creditors that they needed to ease repayment terms immediately and offer more relief once the country hit budget targets that can put it on a path to manageable debt by the end of the decade. But she did not explain what that additional relief would entail.

And she said the I.M.F. would not approve the next disbursement of aid to Greece until a major plank of the agreement was satisfied: more loans for Greece to enable it to buy back its debt at a discount.

The measures decided early Tuesday include longer maturities and lower interest rates for Greece’s bailout loans. And central banks in countries that use the euro agreed to return to Greece any profits made on Greek bonds purchased by the European Central Bank.

The program still needs approval by some national parliaments in the euro area, including Germany’s, where the prospect of sending new bailout money to Greece is seen as politically untenable, at least until after German elections next year.

Lawmakers in Berlin have begun debating the agreement on Greece. The German finance minister, Wolfgang Schäuble, indicated that he hoped approval could be obtained by the end of the week.

At best, the deal bought time for Germany and other chief creditors before they might need to accept outright write-downs, or haircuts, on Greece’s debts, according to analysts.

Using guarded language, Mr. Schäuble said early Tuesday that once Greece had “fulfilled all of its conditions, we will, if need be, consider further measures for the reduction of the total debt.”

Fabio Fois, an economist at Barclays, wrote in a briefing note on Tuesday that “an outright haircut on E.U. loans of at least 20 percent” would still be needed. He also suggested that “the positive response of the market might prove short-lived.”

There will almost certainly be sparring over Greece for years to come, particularly because the Germans, backed by the Dutch and the Finns, remain wary of forgiving Greece’s debt.

Among main concerns on Tuesday was the lack of clarity about the buyback plan. Analysts said they expected euro area states to lend Greece money to buy back its own bonds from private investors at discounted prices. But there were questions about the plan, including when it would take place and whether bondholders would accept the terms.

To complete the buyback, the Greek government would have to borrow about 10 billion euros, or $13 billion.

Until those details are resolved, Greece is not supposed to receive the next installment of bailout money — about 34.4 billion euros — that has already been long delayed.

In Athens, Prime Minister Antonis Samaras on Tuesday hailed the agreement as the start of “a new day for all Greeks,” but his coalition partner, Evangelos Venizelos, the Socialist leader, hinted at concerns. The accord was “undoubtedly positive,” but there were “things to note in the details,” Mr. Venizelos said.

Despite the unresolved issues, analysts expected the emergency aid to be paid to Greece in mid-December, with further payments in the first quarter of next year as long as Greece continues to fulfill its pledges under the bailout plan.

The aid has been called vital for preventing Greece from defaulting on its loans.

The delay means that the Greek government’s unpaid bills, which stood at 8.3 billion euros at the end of September for goods like medicines and services like construction, “will continue to grow for at least a couple of weeks,” said Janet Henry, the chief European economist at HSBC.

Some analysts predicted problems arising from the I.M.F.’s continued insistence on ambitious debt-reduction goals. The new target is a reduction of debt to 124 percent of gross domestic product by 2020, from 175 percent now.

Zsolt Darvas, a fellow at Bruegel, a research organization, said reaching that goal would require “perfect implementation.”

“A lot of luck will be needed, including a rebound in growth,” he added. Otherwise, he said, Greece’s financial problems would continue and “the social pressure on the government and the parliament could increase.”

The coalition government could eventually collapse, “leading to a euro exit with disastrous consequences inside and outside Greece,” Mr. Darvas said.

Greece’s economy was contracting at a 6.4 percent annual pace and was expected to continue to stagnate next year. Promises to cut an additional 9 billion euros out of the economy could further aggravate an increasingly agitated society weary of austerity and undermine the fragile coalition government.

Contributing reporting were Liz Alderman from Paris, Melissa Eddy from Berlin and Niki Kit santonis from Athens.

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