Not out of woods

America has stepped back from the financial brink with the US Congress reaching  an agreement just before  the deadline and President Obama signing  it into law.

The agreement put the paralysed US government back into working  and  raised  the debt ceiling for some time. It is a victory for the Democrats and Obama, who stuck to his position that  he would not surrender to blackmail on the health care scheme.   The only concession that he made was that the administration would set up procedures to verify the incomes of those who are seeking insurance subsidies under the  scheme.  That is an insignificant gain for the Republicans who should  rue the standoff which created the crisis, as it has made them unpopular.

But what the administration gained might still be only a temporary reprieve. The Congress vote only enables the extension of funding of US government till the middle of January 2014 and of the limit on US debt till February 7.  So the confrontation, with an attendant financial crisis, may return early next year, if  the hawks among the Republicans prevail over the mainstream view of the party. The uncertainty will do a lot damage to the standing of the US and may hurt the prospects of an early economic recovery. The $ 24 billion loss to the GDP caused by the shutdown may not matter much to the US economy but the questions  that have been raised about the stability and reliability of the world’s biggest economy  are bound to be damaging.

There is a view that China, which has the second largest economy and aspires to replace the US at the top slot, has already gained a psychological advantage. If a negative view of the US economic recovery persists because of the underlying political risks, the flow of funds back to the country, which had started recently, might slow down. This might however give some relief to emerging countries like India, which have been hit by this shift of funds.

These countries might also gain by a possible further extension of the tapering of the US stimulus. The current uncertainty might persuade the Federal Reserve to hold its withdrawal plans for a longer while. That would give countries like India more time to prepare for the eventual  closing of the easy money tap.

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