The United States recently reached an agreement to raise its debt ceiling, but this move did not placate the markets. Yesterday markets did not perform well. Despite a consensus between American republicans and democrats that has (technically) prevented the worlds largest economy from defaulting on payments, the countrys rating could still drop and they will continue to face serious issues.
The agreement would entail raising the debt ceiling by 2 trillion dollars and reducing the national deficit by at least 2.5 trillion dollars over the next ten years. These figures are insufficient for prompting a rating drop according to recent news from S&P.
Further, various issues are pending from the last parliamentary referendum, as happened with the small print and fringe issues that came to light after the European summit on July 21. But it's unlikely that these formal steps will be taken. And the markets are losing patience, because they are anxious about another round of worldwide recession given that there are already enough ingredients to make the cocktail.
The downturn in the markets is nothing but a louder replay of what happened several days ago when European leaders devised the second Greek recovery.
After some initial glimmers of hope, there will be a collapse because the markets understand that political announcements are different than active follow-through, the details of both agreements are still being worked out, and the measures are likely insufficient to cope with serious turbulence in the markets. Investors on both sides of the Atlantic are identifying similar deficiencies in the agreements.
It seems that both agreements are painting a pretty picture of effective change, but scratching beneath the surface reveals something we cannot admire: that they are not resolving the underlying problems with the global economy, and doing a clumsy job of it. In Europe's case, the only thing they have done is continue doling out aid to Greece without taking measures to assure that the debt crisis does not spread to other peripheral countries. In the United States, macroeconomic data are not encouraging and fiscal adjustments are being parsed out with utmost care, which is creating fear of a relapse that, combined with fear originating in the Eurozone, could precipitate a second and more serious recession in the world economy. Governments will be wrapped in long-lasting and painful debt. The markets think that this time doesn't have to be different. There is nothing until the day that they are pumped up with confidence to rule out the hypothesis that we would sink into global weakness once again.
