China says US has 'responsibility' to resolve debt ceiling row

Vice-finance minister Zhu Guangyao outlines concern over 'safety of Chinese investments in the United States'

A senior Chinese government official on Monday publicly warned Washington about the dangers of the current row over the US’s debt ceiling.

In the Chinese government's first public comments on the deadlock Zhu Guangyao, the vice-finance minister, told reporters in Beijing: “The United States is totally clear about China's concerns about the fiscal cliff. We ask that the United States earnestly takes steps to resolve in a timely way before 17 October the political [issues] around the debt ceiling and prevent a US debt default to ensure safety of Chinese investments in the United States and the global economic recovery. This is the United States' responsibility.”

China is the largest foreign holder of US debt, owning about $1.277tn of US Treasury bonds at the end of July, according to the Treasury. For bond holders, economists and other investors, the row over the debt ceiling is likely to have a far greater impact than the current government shutdown.

The US Treasury secretary, Jack Lew, warned again on Sunday that by 17 October the US will be left with about $30bn in cash to meet its obligations – which are about $60bn a day – unless Congress acts soon to increase the US’s borrowing limit. “Congress is playing with fire,” Lew told CNN”s State of the Union. “If the United States government, for the first time in its history, chooses not to pay its bills on time, we will be in default. There is no option that prevents us from being in default if we don’t have enough cash to pay our bills.”

Republican House Speaker John Boehner said at the weekend that his colleagues would not agree to raise the debt ceiling unless any deal included measures to rein in public spending. President Barack Obama has accused Republicans of “blackmail” in their attempts to kill his healthcare reforms, known as Obamacare.

Zhu said China and the US were "inseparable". "The executive branch of the US government has to take decisive and credible steps to avoid a default on its Treasury bonds," he said. "It is important for the US economy as well as the global economy."

"We hope the United States fully understands the lessons of history," Zhu added, referring to a similar row over the debt ceiling in 2011 that led to a historic downgrade of the US's AAA credit rating and panic on stock markets worldwide.

Zhu’s comments came as US stock markets fell following the continued impasse over the shutdown and debt ceiling over the weekend. The Dow Jones Industrial Average fell 136.34 points, or 0.9%, to 14,936.24, below the 15,000 mark it reached for the first time last May. All the other US markets closed down, with the S&P 500 dropping 37.38 points (0.98%). Most European and Asian markets closed down as rises were seen in US Treasury notes and gold prices, both traditionally seen as safe havens. The dollar lost ground against the yen and the euro.

Daniel Rosen, founding partner of the research firm Rhodium Group, said political infighting in Washington was likely to have a profound impact on Sino-US financial relations.

“I believe that in the final analysis the US is going to pay its debts and is not going to default on its obligations,” he said. “Even assuming that case, it is politically untenable for the government of China to be in a position, whether frequently or occasionally, where the life savings of the country are going to eroded by the political shenanigans of another country.”

Rosen said China was looking at ways to move its huge dollar denominated investments into the private sector and out of the government’s coffers before the current crisis began. “But for the moment they are trapped and they have to deal with the portfolio they have,” he said.

Article Source : http://www.guardian.co.uk

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Chrysler files for stock market IPO

Fiat seeking to buy United Auto Workers' stake but auto giant set to join General Motors and Ford in being publicly traded

Chrysler filed for an initial public offering on Monday, in a move that will put all three US car giants back on the stock markets after their brushes with disaster.

Italy's Fiat owns 58.5% of Chrysler and had wanted to buy the remaining stake, which is held by the United Auto Workers (UAW) Retiree Medical Benefits Trust. The two sides have negotiated for months but failed to reach an agreement. The UAW's retiree healthcare trust has not disclosed how much it wants for its 41.5% stake, which it gained as part of the US's government's bailout of the company.

Should the IPO go ahead, this will be the first time since 1998 that all three Detroit auto firms will be publicly traded companies on the US stock markets. Chrysler and General Motors both filed for bankruptcy in 2009 as the recession brought their already struggling businesses to the point of collapse. GM conducted an IPO in November 2010.

Sales have been surging at Chrysler, which is the third-biggest American carmaker after General Motors and Ford. The recovery in the housing market and construction have boosted truck sales and new vehicles have attracted more confident consumers. In the second quarter its profits rose 16% to $507m. Chrysler has reported full-year profits for the last two years.

The company's earnings have been a boost Fiat, which has been struggling with the continuing aftermath of the financial crisis in the European market. An IPO would be a blow to Sergio Marchionne, chief executive of both Fiat and Chrysler. Marchionne has overseen a remarkable turnaround in the US company and had been keen to take full control.

Fiat was allowed to take control of Chrysler in 2009, in return for a pledge to develop and build fuel-efficient cars in the US. The deal does not give Fiat access to Chrysler's cash, an issue that would be resolved if Marchionne is able to merge the two firms.

The IPO could be derailed if Marchionne can restart negotiations with the UAW. "Fiat remains available to continue the discussion," he told analysts after the second-quarter earnings. He has previously said he would IPO a joint company on the US stock markets.

Article Source : http://www.guardian.co.uk

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Federal Reserve maintains bond-buying stimulus in surprise move

Markets cheered as federal open markets committee says US recovery is too fragile to cut back on $85bn-a-month stimulus

US stock markets hit record highs Wednesday as the Federal Reserve surprised investors by announcing that the economic recovery was too fragile to cut back on its massive $85bn-a-month stimulus program.

After a two-day meeting, the federal open market committee (FOMC) said it required "more evidence that progress will be sustained". The news delighted the markets which had sunk ahead of the news on fears that the Fed was preparing to "taper" the so-called quantitative easing (QE) program. Even the threat of a slight reduction in the stimulus spooked the markets in July.

But the news also underlined the precarious state of the wider economy as a row over the US's debt limit threatens a government shutdown. In a press conference Ben Bernanke, Fed chairman, warned that the current row could have "very serious consequences".

Analysts had expected the Fed to announce that it was preparing to trim back QE, a huge bond-buying scheme aimed at keeping interest rates down and encouraging business investment.

Bernanke signalled in July that the scheme would be cut back and that such a move could be announced in September. But the FOMC concluded to leave the scheme intact for now.

The committee said it saw "improvement in economic activity and labor market conditions". But it added: "However, the committee decided to await more evidence that progress will be sustained before adjusting the pace of its purchases."

It would continue to closely monitor economic and financial developments in coming months and continue its purchases of Treasury and mortgage-backed securities "until the outlook for the labor market has improved substantially in a context of price stability".

Bernanke warned that the political clash over the US's debt limit and the threat of a government shutdown were all likely to harm the economy. "A government shutdown and failure to raise the debt limit could have very serious consequences for financial markets and the economy," he said.

The FOMC said fiscal policy was "restraining economic growth" and expressed concern about rising mortgage rates and the still high unemployment rate. Bernanke said the FOMC's ability to mitigate the impact of a debt ceiling crisis was "very limited".

Bernanke has linked any tapering of the QE policy to a sustained decline in the unemployment rate. US unemployment dipped to 7.3% last month, down from 8.1% a year ago. But the pace of job recovery remains sluggish and the latest drop was driven in part by people deciding to leave the workforce. The labour force participation rate slumped to 63.2%, its worst reading in 35 years.

Only one member of the FOMC, Esther George, chief executive of the Federal Reserve Bank of Kansas City, voted against the decision not to cut back on QE. She has been a persistent critic of the scheme. According to the Fed, George "was concerned that the continued high level of monetary accommodation increased the risks of future economic and financial imbalances and, over time, could cause an increase in long-term inflation expectations".

US stock markets soared to record highs shortly after its release. Both the Dow Jones and S&P 500 set new records after the news. The Dow closed up over 147 points at 15676.94, the 31st time this year it has set a new record. Oil and gold prices also rose. The yields for the benchmark 10-year Treasury note sunk and the dollar slumped to a seven month low against the euro.

President Barack Obama is now assessing potential successors and Bernanke's second term ends in January. On Sunday former Treasury secretary Larry Summers withdrew from the race leaving vice-chairman Janet Yellen seen as most likely to succeed to the post. Bernanke declined to comment on the succession. "I'd prefer not to talk about my plans at this point," he said.

The Fed's move comes as the US faces a potentially disastrous row over increasing its borrowing limits. In 2011 a standoff in Congress over the debt ceiling led to a historic downgrade of US debt and panic on the financial markets.

Obama accused Republicans of trying to "extort" him Tuesday by holding up negotiations unless he is prepared to amend or scarp his landmark healthcare reforms, the Affordable Care Act. Republican House speaker John Boehner hit back Wednesday calling Obamacare "a train wreck", as other party leaders set out further terms and conditions for raising the limit. The two sides are now at an impasse just days before the 30 September deadline to pass a government funding bill.

The government reached its $16.7tn debt limit in May and has been employing emergency measures to manage its cash, such as suspending investments in pension funds for federal workers, to stay below the line. But Treasury secretary Jack Lew has warned that the government will run out of room to manoeuvre in October and will be unable to meet its obligations.

On Tuesday Lew warned Congress again that a prolonged argument over the debt limit could do lead the US to default on its debts and irrevocably damage to the economy. "We cannot afford for Congress to gamble with the full faith and credit of the United States," Lew told the Economic Club of Washington.

A default would likely cause turmoil on world stock markets and a sharp rise in interest rates. Lew repeated a warning he made last month that the Treasury would soon be left with only around $50bn in cash on hand. The Treasury pays investors about $100bn to investors every Thursday that investors immediately lend back to the government, a process known as rolling over the debt.

"If US bondholders decided that they wanted to be repaid rather than continuing to roll over their investments, we could unexpectedly dissipate our entire cash balance," Lew said.

Default could come soon after that and would likely rock Wall Street and lead to a sharp rise in interest rates.

Article Source : http://www.guardian.co.uk

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US economy expands at stronger rate in second quarter, figures show

Rate of GDP growth more than double the pace clocked in prior three months and stronger than the 2.2% economists forecast

The US economy expanded at a stronger rate in the second quarter than previously estimated, according to figures released on Thursday.

After a boost to figures for exports and business investments, the Commerce Department revised its measure of the nation's gross domestic product (GDP), the broadest measure of goods and services produced in the economy, to an annual rate of 2.5% in the second quarter, up from an initial estimate of 1.7% reported last month.

The rate of growth was more than double the pace clocked in the prior three months and stronger than the 2.2% that economists polled by Reuters had forecast.

US stock markets reacted positively to the news, which was released as the Labor Department reported another slide in the number of people claiming unemployment benefits for the first time. Initial claims for state unemployment benefits slipped 6,000 to a seasonally adjusted 331,000 for the week ending 24 August, the Labor Department said.

The report comes as the Federal Reserve appears close to cutting back on its $85bn a month bond-buying stimulus programme, known as quantitative easing. Federal Reserve chairman Ben Bernanke has indicated that the programme could be scaled back as early as later this year but has as yet not specified a date.

Bernanke has tied a cut in QE to the unemployment rate. Next Friday the US releases its monthly tally of employment figures, the non-farm payroll report. The continued fall in initial claims helped push the unemployment rate to 7.4% last month, its lowest level since late 2008.

However, economists warned that problems remained in the US economy and the revision in GDP also highlighted some of those weaknesses. Consumer spending remained unchanged in the quarter and state and local government spending fell in the quarter as compared to being up in the initial estimate.

Gus Faucher, senior economist at PNC Financial Services, said the rise was good news. "But it's still a 1.6% rise year over year, and that's soft. We are still down 2m jobs and we are seeing significant drag from tax increases and spending cuts."

Faucher said growth should pick up in the second half of 2013 and into 2014. "Consumers are adjusting to higher taxes. Business investment will continue to improve as profits are at a record high and borrowing costs are still very low, despite the recent increase in rates," he said.

Dan Greenhaus, chief global strategist with broker BTIG said: "With the revisions, our original estimate calling for 1.5% growth in the first half was a bit under what has actually occurred. That's a positive but of course what matters now is not what has happened but what will happen. In that regard, the consensus still expects roughly 2.5% growth in the second half but that may prove to be too optimistic."

The GDP figures come amid a looming clash in Washington over the "debt ceiling" – the limit set by Congress on the US's ability to borrow. Treasury secretary Jack Lew warned earlier this week that if Congress fails to act soon, the US would hit its debt limit by mid-October.

Failure to reach a new agreement would risk "irreparable harm" to the US economy and leave the government struggling to make the 80m payments a month it sends out, including military salaries and social security cheques, he said.

Faucher said failure to raise the debt ceiling would be "disastrous – worse than a government shutdown." But he said ultimately he expected Congress would act to see off the crisis.

Article Source : http://www.guardian.co.uk

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