US fiscal cliff facts

The so-called fiscal cliff is a combination of dramatic spending cuts and tax increases mandated to take effect beginning in January if President Barack Obama and Republicans cannot bridge their differences on how best to reduce the nation's budget deficit and debt.To add to a drama that could reverse the slow US recovery and impact the global economy, the United States is also about to reach its borrowing limit, so Congress will also be asked to raise the government's debt ceiling.

What is the fiscal cliff?

The Budget Control Act of 2011 codified in law a grudging political compromise forcing the government to slash spending by $1.2 trillion over 10 years from January 1 2013. Next year's cuts, called "sequestration," would be about $109bn.Also on that date, a package of tax reductions and an extension of unemployment benefits will expire, meaning taxes will rise significantly for most Americans.

Why will this happen?

Democrats and Republicans have long been deadlocked over whether to address a $1 trillion-plus annual budget gap with higher taxes or lower spending.The Budget Control Act was a poison pill deal designed to force them to find a less austere compromise, but political wrangling and dysfunction meant no deal was done, and the deadline is now looming.

What happens if the cliff is not avoided?

Together, higher taxes and lowered spending could slice the $1.1 trillion deficit racked up in fiscal 2012 (ended September 30) by almost $500bn next year, according to the Congressional Budget Office, vastly improving the government's financial picture .But the CBO estimates the shock treatment would send the country back to recession and push the unemployment rate to 9.1%.Deep cuts would come to both defence and non-defence spending. Government suppliers and contractors would lose business, and temporary furloughs could be in store for tens of thousands of federal employees.Taxes and automatic paycheck deductions would increase for most Americans, reducing the cash they have for spending, and taxes on capital gains and dividends would rise, hitting investors.

What is the debt ceiling?

The US government will hit its statutory $16.39 trillion debt limit on Monday, according to Treasury Secretary Timothy Geithner. The limit is set by Congress, and if it is not raised, the United States will not be able to borrow any more money and would, in theory, be forced to slash spending to make ends meet. Possible, but desperate, remedies would include halting pay to the military, retirement health benefits, social security, and failing to pay government debts.

Will the US default on its debt?

Not immediately. The Treasury has various extraordinary measures in its armory, including halting the issuance of securities to state and local governments, which could buy about two months of leeway.

What would a default mean?

No one is sure: the dollar, and Treasury bonds, are the primary currency of global finance, and holders do not really have any alternatives. And most believe that eventually the US government would make good on its debts. However, the country's credit rating could be further downgraded, likely pushing up its borrowing costs over the medium term and possibly diminishing the dollar's cachet in world finance.

What will Congress do?

Eventually, Congress is likely to raise the debt ceiling but Republicans who run the House of Representatives will use the showdown as leverage to demand spending cuts from Obama in return. It is uncertain how high the raised borrowing limit will be, and any resolution will likely trigger a new confrontation between Obama and Republicans the next time around.

Talks stall as fiscal cliff looms

Two days of last-gasp talks produced no deal on Sunday between US political leaders struggling to averting a fiscal calamity due to hit the American and world economy within hours.Party leaders in the US Senate groped for a compromise to head-off a punishing package of spending cuts and tax hikes that is due come into force on January 1 and which could roil global markets and plunge the US into recession.Senate Republican minority leader Mitch McConnell warned that, despite through-the-night talks, negotiators were still a long way from success, as they raced against the ebbing 2012 calendar in search of a compromise.McConnell said he received no response to a "good faith offer" to Senate Democrats and had spoken twice by telephone with his old friend and sparring partner Vice President Joe Biden in the hope of breaking the stalemate.Senate Democratic Majority Leader Harry Reid agreed that talks were at a standstill, and warned that Americans could ring in the New Year with no deal to avert a budget disaster known as the "fiscal cliff.""There is still significant distance between the two sides, but negotiations continue," Reid told the Senate, after huddling for nearly two hours with his Democratic caucus on one of the latest December Senate workdays in 50 years."There is still time left to reach an agreement, and we intend to continue negotiations," he said, as he ordered the Senate back into session at 11:00am (16:00 GMT) Monday, New Year's eve and the last day before the deadline.Reid said Democrats were unwilling to brook talk of social security cuts."This morning, we have been trying to come up with some counteroffer to my friend's proposal," Reid told the Senate. "We have been unable to do that."The already tense mood on Capitol Hill had soured during Sunday's confusing hours, when some lawmakers tossed out varying versions of what may or may not be in Democratic and Republican offers. "I'm incredibly disappointed we cannot seem to find common ground. I think we're going over the cliff," Republican Senator Lindsey Graham said on Twitter.Moderate Democrat Clair McCaskill was also pessimistic."This is definitely not a kumbaya moment," she said.Earlier, President Barack Obama accused Republicans of causing the mess, saying they had refused to move on what he said were genuine offers of compromise from his Democrats."Now the pressure's on Congress to produce," Obama said, in an interview with NBC's "Meet the Press" that was recorded on Saturday, a day after he expressed modest optimism that a deal could be reached.Obama said it had been "very hard" for top Republican leaders to accept that "taxes on the wealthiest Americans should go up a little bit, as part of an overall deficit reduction package."But Republicans were irked by Obama's tone. "I don't know if this is the president saying $250 (thousand) or 'Go to hell'," Graham told reporters, referring to Obama's insistence that taxes rise on households income greater than a quarter million dollars per year.The Senate's number two Democrat, Dick Durbin, said Republicans want the tax threshold be raised to $550 000 per household and that Democrats might counter with $450 000, considerably higher than the president's $250 000.But Reid warned: "We're still left with a proposal they've given us that protects the wealthy and not the middle class. I'm not going to agree to that"If no deal is reached, a package of tax cuts for all Americans that was first passed by then-president George W. Bush will expire on January 1.All American workers will see their own paycheck hit and the broader economy will suffer from massive automatic spending cuts across the government.Experts expect the US economy to slide into recession if the standoff is prolonged, in a scenario that could cause turmoil in stock markets and hit prospects for global growth in 2013.The president won re-election partly on a platform of raising taxes on the rich, but Republicans who run the House of Representatives oppose tax hikes as a point of principle and claim Obama is addicted to runaway spending.Any deal must pass the Senate, before going to the House, where such is the power of the conservative bloc of the Republican Party, it is unclear whether any solution backed by Obama can win majority support.If leaders fail to find agreement, Obama has demanded a vote on his fallback plan that would preserve lower tax rates for families on less than $250 000 a year and extend unemployment insurance for two million people.Republicans admitted such an option could emerge on Monday.

Spain faces €207bn headache in 2013

Spain defied the markets by averting a sovereign bailout this year but high interest rates could yet force Madrid to its knees as the nation confronts a €207bn financing headache in 2013.The eurozone's fourth-biggest economy has skirted a rescue so far even after slipping into a recession in mid-2011 that has sent the unemployment rate soaring to 25%, the highest in Spain's modern history.Prime Minister Mariano Rajoy's government reached out in June for a eurozone rescue loan of up to €100bn to fix the balance sheets of Spanish banks, crushed by bad loans since a 2008 property crash.But even as investors fled Spain, sending its 10-year-bond yield above 7% mid-year as they watched Madrid struggle to curb soaring public debt, Rajoy managed to swerve the politically costly option of pleading for international help.European Central Bank chief Mario Draghi gave decisive support in September when he announced the bank's readiness to buy an unlimited sum of bonds to curb borrowing costs for member states that accept strict conditions.The prospect of such intervention alone was enough to calm the selling of Spanish debt securities.A grateful Rajoy says he can get by for now without even seeking the ECB's bond-buying intervention.Spain's 10-year bond yields were trading below 5.3% in the past week.In his final news conference of the year, the prime minister warned that Spain's economy faced a "very tough" year ahead."Today we are not thinking of asking the European Central Bank to intervene to buy bonds on the secondary market but that is a very useful instrument that is available to all countries of the union," he added."If Spain and its government believe that it is necessary to use it, let there not be the least doubt that we will do so. But in principle today we are not thinking of doing it," the premier said on Friday.That could change, analysts say.Spain's budget for 2013 anticipates that the Treasury will have to issue €207.2bn in gross debt in 2013, almost all through bonds and bills, to cover debt repayments and new financing needs.That compares to the €186.1bn in gross debt that last year's budget previewed for 2012."The country is heading in the right direction in reducing its deficit. But in the end, it will all depend on the markets," said Rafael Pampillon, head of economic analysis at Madrid's IE Business School.Concern over a shift in Italian economic policy with February 24-25 elections on the horizon, and doubts over Spain's ability to finance its debts or meet its deficit-cutting targets could yet push up Spanish borrowing costs, he said.At one point in mid-summer, investors in Spanish 10-year bonds demanded a premium of 600 basis points in annual return over the safe-bet German equivalent. Since Monti's offer to intervene, that has fallen to around 400 points, still a significant extra cost.Most economists now believe Spain can skirt a rescue at least in the immediate future.A sovereign rescue is not impossible, said Edward Hugh, economist based near Barcelona in the northeastern region of Catalonia."But they will definitely put it off for as long as they can, and at the moment it seems that they can put if off for quite a long time," he added.In the meantime Spain still faces steep financing costs, said Jesus Castillo, economist at French investment bank Natixis.The Spanish 10-year bond yield affected not only the state's borrowing cost but also that of many households and businesses, Castillo said.The risk premium charged on Spanish debt, even now, was "not viable over the long term", he warned."If the Spanish economy is being strangled today it is because a high interest rate is killing off investment plans as they are born," he said.It is an argument that seems to plead for a bailout.If the ECB could bring down interest rates, some say, it would breathe new life into the economy, which is expected to shrink 1.5% this year. Next year, the government tips a further 0.5% slump and most private forecasters are expecting a much sharper decline.But Spaniards themselves seem to be divided over a bailout, even as they suffer an unprecedented programme of austerity measures designed to bring the public deficit under control.A survey by Madrid pollster InvyMark for a Spanish television channel this month found 54.5% of those asked believed Rajoy should not ask for a sovereign bailout, against 31.5% who were in favour.More than two-thirds - 69.1% - said they thought such aid from Europe would not be positive for hard-hit Spaniards.

Merkel challenger remarks spark outrage

Chancellor candidate Peer Steinbrueck was widely criticised on Sunday, even by his own centre-left Social Democrats (SPD), for saying German leaders are underpaid. Steinbrueck has struggled to gain ground against Chancellor Angela Merkel ahead of next September's election, in part due to lingering criticism over him earning €1.25m as an after-dinner speaker in the past three years.The remarks from the former finance minister about what he called the inadequate compensation for the chancellor drew speedy rebukes across the country's political spectrum, including from the last SPD chancellor Gerhard Schroeder."A German chancellor does not earn enough based on the performance that is required of her or him compared with the jobs of others who have far less responsibility and far more pay," Steinbrueck, 65, was quoted on Sunday by the Frankfurter Allgemeine Sonntagszeitung newspaper saying. "Nearly every savings bank director in North Rhine-Westphalia earns more than the chancellor does," Steinbrueck said of his home state. Merkel's pay is set to rise by €930 per month to €17 106 in 2013 along with pay rises for her ministers and members of parliament, increases that have been criticised by some for sending the wrong signal in an era of austerity. "Some of the debates kicked up by the 'guardians of public virtue' are grotesque and are harmful for anyone considering getting involved in politics," Steinbrueck said. ElectionThe SPD trails Merkel's conservatives by 10 points in opinion polls, but, with its Greens allies, it does have a chance of winning power in September because of the prolonged weakness of Merkel's Free Democrat (FDP) coalition partners. Steinbrueck, whose blunt talk makes him popular among some voters despite him never winning a major election and him being defeated as state premier in North Rhine-Westphalia in 2005, said there were times in his career when he was not as well off and admitted he was now a "wealthy Social Democrat". Schroeder, chancellor from 1998 to 2005, has endorsed Steinbrueck to lead his party against Merkel but distanced himself from Steinbrueck's views on pay."In my view politicians in Germany are adequately compensated," Schroeder told Bild am Sonntag newspaper. "I was certainly always able to live off the pay. And anyone who doesn't feel it's enough pay can always look for another job."Other SPD leaders indirectly criticised Steinbrueck. Dieter Wiefelspuetz, a top SPD member of parliament, said politicians were misguided if they compared their wages to private industry."To serve as chancellor is a fascinating job and the pay is definitely not shabby," he said.Steinbrueck was once seen as the centre left's best hope of winning back the chancellorship. He was popular as the no-nonsense finance minister and the SPD hoped he would siphon centrist voters away from the conservatives. But the controversy over his earning €1.25m for 89 speeches will not go away and his campaign has been marred by setbacks and awkward comments. Analysts say he is also struggling to win over female voters, many of whom are put off by his combative style. "Merkel is popular due to a 'woman's bonus' that she gets," Steinbrueck told the paper.