US debt crisis: markets continue to fall despite Obama’s calming words

Obama hits back at S&P’s downgrading of US credit rating and blames Tea Party Republicans for loss of AAA status Barack Obama has dismissed Standard and Poor’s downgrading of America’s credit rating and insisted the US remained an AAA country. In his first words since S&P’s decision on Friday evening, he sought to calm the markets, which had been tumbling since opening, saying America’s problems were solvable, providing there was the necessary political will. “This is the United States of America. No matter what some agency says, we will always be a triple A country,” he said. As well as seeking to reassure the markets, Obama also sought to protect his chances of re-election to the White House next year by blaming the decision on Tea Party Republicans. The downgrade, the first in American history, provides the Republicans with a powerful stick to with which beat him in the election campaign. Candidates seeking the party nomination to take on Obama pinned responsibility on the president, saying he had provided poor leadership and failed to take desperately-needed action to make even deeper debt cuts. A CNN poll showed 75% of those surveyed felt the economy was going badly – up 15% since May. Despite the Wall Street selloff, prompted by the ratings downgrade, international investors piled into US treasury bonds. By midday in New York, two-year US Treasuries were in such demand that their yields hit an all-time low of 0.24%. At the same time, 10-year Treasuries fell to 2.36%. Analysts said that – compared with the problems mounting in the eurozone – the US looked a safe haven. The VIX index – known as the “index of fear”, because it measures market confidence – jumped to levels not seen since the depths of the 2009 recession. Obama spoke from the White House while the markets were still open in the hope that he might have an influence – but they continued falling during and even after his statement. The president, blaming the Republicans, said the downgrade was not so much because of doubts about America’s ability to pay its debts but the month of wrangling in Washington over the debt ceiling rise. The question was a political one, not a financial one, he said. In a swipe at S&P, he noted that other credit agencies had not joined it in downgrading America. “It does not mean we don’t have a problem,” Obama said, citing the deadlock in Washington over the last month. He said the threat from the Republicans had upset the market, and that was a “legitimate concern”. But he claimed there was good news in that the problem could be fixed by balancing the budget and the new Congressional super-committee being set up to look at spending cuts and revenue raising could provide the answers. Good bipartisan proposals were out there, he said. “It is the lack of political will in Washington” that was the problem. He would put forward proposals of his own over the next few weeks. His statement is unlikely to create much confidence that there will be a bipartisan agreement. The president insisted there had to be tax raising measures, a move the Republicans say they will not even contemplate. Obama also said that any cuts in benefits, such as Medicare, would be “modest”, while Republicans are looking for deep cuts. Much of the political action this week will be in Iowa, the first state where the Republicans will hold their caucus early next year to choose a candidate to take on Obama. Most of the Republican hopefuls will be campaigning in the state this week ahead of a televised debate on Thursday and a straw poll on Saturday. However, the candidates lined up on Monday to blame Obama. The present Republican frontrunner, Mitt Romney, speaking in New Hampshire, another of the early states in the Republican nomination battle, said Obama was primarily responsible for the downgrade because he had failed to stimulate economic growth. He added that some of the blame could be placed on Democrats and Republicans in previous Congresses. “No, I don’t think it’s simply the president’s fault. I’m sure there are many people who share responsibility in Washington for the excessive spending over the last couple of decades,” Romney said. Democrats, most of them anonymous, also criticised Obama, saying his present troubles are a direct result of his failure to stand up to the Tea Party Republicans during the debt ceiling stand-off. There is unlikely to be much relief for Obama over the summer holidays. The political focus will shift to the composition of a new Congressional super-committee set up as part of the deal last week to draw up detailed plans for debt reduction. The committee is due to begin work in September and identify areas for spending cuts before the end of the year. The Obama administration expressed hope that the downgrade will put pressure on the bipartisan committee to reach a compromise. But Republicans, having fought two successful guerrilla campaigns this year so far in which they threatened to close down the federal government and force the US to default, are almost certain to renew hostilities over spending. Ha-Joon Chang, page 26 US economy Financial crisis Global recession United States Barack Obama Banking Stock markets Economics Ewen MacAskill guardian.co.uk

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