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.

NEWS,07.10.2012

Chavez's socialist rule at risk as Venezuelans vote

Venezuelans have voted with President Hugo Chavez's 14-year socialist revolution on the line as the leftist leader faced youthful rival Henrique Capriles in his toughest electoral challenge yet. Henrique Capriles, a centrist state governor, edged toward the still popular Chavez in final polls thanks to a vigorous campaign that united the opposition and made him its best chance of ending Chavez's 14-year rule.Chavez has used record oil revenue to support ideological allies around the world, while preaching a fiercely anti-US line, so the election will be watched eagerly from the United States to Belarus and Iran.Across the poor neighbourhoods where the flamboyant former soldier draws his most fervent following, loyalists prepared to blow bugles and trumpets in a predawn wake-up call for voters.Opposition sympathizers banged pots and pans in a protest against Chavez on Saturday night, creating a racket in the upscale neighbourhoods of eastern Caracas. In the city centre, which is more pro-government, the noise was drowned out by supporters playing his campaign music and shouting his name."I ask political actors from the left, right and centre to prepare emotionally to accept tomorrow's results. It's not going to be the end of the world for anyone," Chavez said at a last- minute news conference at the presidential palace.The 58-year-old president staged a remarkable comeback from cancer this year. But he could not match the energy of past campaigns - or the pace set by his 40-year-old basketball-loving opponent.Most well-known pollsters put Chavez in front. But two have Capriles just ahead, and his numbers have crept up in others.There is a risk of violence if the result is contested.There will be no formal international observers, although Venezuela invited a delegation of the UNASUR group of South American nations to "accompany" the vote.Local groups will be monitoring and both sides say they trust the electronic, fingerprint vote system. The opposition says it will have witnesses at all of the 13,810 polling centres from tiny Amazon villages to tough Caracas slums.Capriles geared up on Saturday for the vote by hiking a mountain trail at the edge of Caracas that is popular with athletic Venezuelans. He donned running clothes and mirrored sunglasses, and posed for pictures with supporters.Chavez spent about half an hour in the evening speaking to reporters alongside members of the UNASUR delegation, headed by an Argentine politician. Asked by one reporter if he wanted to stay in office beyond 2018, he glibly replied, "Twenty years is nothing," in reference to a popular Argentine tango song.Capriles shot back via Twitter. "Right now some people continue with the same nonsense and the same stories as always, the difference is this time they're on their way out!"In a politically polarised country where firearms are common and the murder rate is one of the highest in the world, tensions have risen alongside weeks of tough campaign rhetoric, and both camps are vowing to "defend" their votes.Capriles would face big challenges Chavez accuses the opposition of plotting violence and planning to "reject the people's triumph" when he wins, but says that effort will be defeated. Some opposition activists fear he could refuse to step down if the result goes against him.Victory for Capriles would remove the most vocal critic of the United States in Latin America, and could lead to new deals for oil companies in an OPEC nation that pumps about 3 million barrels a day and boasts the world's biggest crude reserves.Capriles wants to copy Brazil's model of respect for private enterprise with strong social welfare programs if he is elected - but he would face enormous challenges from day one.For a start, he would not take office until January 2013, meaning Chavez loyalists might throw obstacles in the way of the transition.He also would have to develop a plan to tackle entrenched high inflation, price distortions and an over-valued currency, while surely butting heads with the National Assembly, judiciary and state oil company PDVSA - all dominated by Chavez loyalists.Another big task would be to figure out the real level of state finances. Last month, a Reuters investigation found that half of public investment went into a secretive off-budget fund controlled by Chavez and had no oversight by Congress.The president has denounced his foes as traitors and told voters they plan to cancel his signature social "missions," which range from subsidized food stores to programs that build houses and pay cash stipends to poor women with children.Tens of thousands of new homes have been handed over this year, often to tearful Chavez supporters at televised events.If Chavez wins, he can consolidate his control over Venezuela's economy and continue his support for leftist governments across Latin America, as well as allies farther afield such as Iranian President Mahmoud Ahmadinejad, Syria's Bashar al-Assad, and Alexander Lukashenko of Belarus.

Spain faces fresh street protests

Thousands of Spaniards have marched in cities across the country to decry tough austerity measures, part of a growing protest movement that shows no signs of abating and could culminate in a general strike in November.Hundreds of thousands of Spaniards took to the streets yesterday, creating a headache for the centre-right government as it faces regional elections and tries to assure investors the country is stable.Spanish labour unions said they would call a general strike if the government did not hold a referendum on unpopular spending cuts. Prime Minister Mariano Rajoy unveiled 13 billion euros in additional savings in a tough budget last month."It's up to the government whether there's a general strike or not. If they were going to hold a referendum things would be completely different," said Ignacio Fernandez Toxo, leader of Spain's biggest union, Comisiones Obreras. Spain is now at the eye of the euro zone storm, with expectations mounting that the government will soon seek European aid to keep its borrowing costs under control."It's shameful - we're losing everything," said Carmen Lopez, a department store worker at Sunday's protest in the capital. "Pensions, salaries, public healthcare and education. They're taking everything."Some 60,000 people attended the union-organised march in the centre of Madrid. "How can there be peace without bread?" and "Their plunder, my crisis", placards read."I'm a teacher and they've really cut back in education - there are fewer resources, fewer teachers and more students," said Agustin Moreno, who teaches in the Madrid neighbourhood of Vallecas."We will do everything we can. We will keep protesting," he added.Protesters were decked out in the colours of various unions, and many wore T-shirts saying "I used to have social and labour rights"."They're taking away help for people who are unemployed, just at the time when people most need the help," said primary school teacher Francisca Valverde.Protests were taking place in dozens of cities on Sunday, but there were no reports of any violence.Under pressure Rajoy's People's Party (PP) faces regional elections in Galicia, the Basque Country and Catalonia - increasingly vocal about its desire to break away from Spain - in the coming weeks.In the wake of violence during a protest in Madrid on September 25, Rajoy urged a business audience in New York last week to focus on the "silent majority" of Spaniards who do not protest.But a survey in El Pais newspaper on Sunday showed 77% of Spaniards support the protesters, while more than 90% think protests will become more frequent.The government is increasingly unpopular at home and must convince uneasy investors that it can keep a lid on social unrest and carry out its austerity policies.The right to protest has become a topic of fierce debate in Spain since the September 25 demonstration ended in 35 arrests and left 64 people injured.Last week politicians from the ruling People's Party (PP) said laws surrounding protests should be tightened up, with Madrid's local government chief Ignacio Gonzalez saying the capital was in "a constant state of collapse" because of demonstrations.But a Spanish court on Thursday threw out a police case against the organisers of the protest, saying people had a right to express their opinion. The court will also investigate police brutality at Madrid's Atocha station during the demonstration.

Wall Street: US companies 'blaming' weakness in Europe

Wall Street may be bracing for a pullback as US season begins next week - if the clouds of profit warnings from bellwethers ranging from FedEx to Hewlett-Packard lead to a downpour of lower profits - or even losses.Thanks to aggressive stimulus plans from central banks around the world, the Standard & Poor's 500 index. SPX gained 5.8% over the third quarter.That sharp rally occurred even as companies were struggling. Earnings for that period are forecast to fall 2.4 percent from the year-ago quarter. If that happens, this would be the first earnings decline in three years..Market strategists and investors say US stock valuations are broadly out of sync with earnings estimates.They forecast a pullback in stocks in the coming weeks as more companies report results and reduce expectations for the fourth quarter and beyond.Fourth-quarter estimates for S&P 500 companies show a 9.5% gain in profit from a year ago, according to Reuters data. Analysts say that outlook is too high, given what investors are already hearing from the corporate world."It's a divergence right now where the valuations as far as equity prices (are concerned) have soared, and are really putting in place a stronger economy and stronger fundamentals," said Alan Lancz, president of Alan B. Lancz & Associates, an investment advisory firm in Toledo, Ohio."But earnings will be the telltale sign," Lancz added. "And if the guidance isn't particularly strong, the market might be setting itself up for a little disappointment. I don't see a major correction, but I do see a pullback."The earnings season will kick off on Tuesday with results from after the bell.Analysts expect Alcoa's third-quarter results to show it broke even, down from a profit of 15 cents per share a year earlier.JPMorgan Chase & Co and Wells Fargo, the first big financial names to report, are also on tap next week.Blame Europe Nearly half of S&P 500 companies guiding lower for third- quarter earnings blamed weakness in Europe, according to a Thomson Reuters survey.Another 11% blamed the weak global economy, 8% cited strength in the US dollar, and 6% cited the slowdown in China, the survey showed.Weakness in the US economy has not helped. The final read on US second-quarter gross domestic product last month showed growth of just 1.3%, weaker than an expected 1.7%.On Thursday, software maker Informatica issued a profit warning and said business conditions were worsening in Europe. The software company is considered a bellwether because its products are used alongside those made by larger software companies."Parts of Europe aren't just in recession, they're in depression," said Jeff Kleintop, chief market strategist at LPL Financial in Boston. "I think (analysts) underestimated the extent of the global slowdown, and maybe are still underestimating it."Tech feels chill from China While estimates have come down sharply in all 10 S&P 500 sectors since the start of the year, technology is one area where the lower expectations are most notable. Slower growth in China is a big factor in that trend.Earnings growth in the tech sector is expected to be just 2.3% for the quarter, compared with a July 1 forecast of 13.1%.Apple is a big driver of those gains.Technology's profit growth has been crucial for the S&P 500. Minus technology, S&P 500 earnings are expected to be down 3.4%.The tech sector is where the slowdown in China's economy is having the biggest impact, Kleintop said."They consume a lot of US technology products," he said.Recent data shows that the pace of growth in China, the world's second-largest economy, may slow for a seventh quarter, straining earnings in the tech and materials sectorsApplied Materials lowered its third-quarter estimates in August, citing China and Europe. On Wednesday, the chip gear maker said it planned to cut its global work force by 6% to 9%.FedEx, the world's second-largest package delivery company, cut its fiscal 2013 forecast on September 18, saying a weakening global economy gives its customers a reason to switch to less expensive and slower shipping options. FedEx said its earnings could drop as much as 6% for its fiscal 2013 year, which will end in May.On Wednesday, shares of Hewlett-Packard fell a whopping 13% to a nine-year low after it forecast a far steeper-than-expected drop in 2013 profit.The slide in HP's stock price sharply cut the Dow industrials' gains for the day.The S&P 500 sectors showing the biggest projected earnings decline are materials, forecast down 24%, and energy, expected down 18.8%, data show, with those declines tied largely to the global slowdown.In contrast, consumer discretionary stocks are expected to have the strongest profit growth for the quarter data showing a gain of 7.7%.