Band-aid U.S. budget deal draws fire abroad

January 2, 2013: 10:51 AM ET
obama fiscal cliff international
U.S. leaders ducked critical issues in fiscal cliff deal
LONDON (CNNMoney)

The United States may have stopped short of diving off the fiscal cliff and dragging the world economy with it but international commentators criticized Washington for failing to reach a broader agreement on how it will pay its way in the longer term.

China's state news agency Xinhua said the U.S. stood on the brink of a "fiscal abyss", with government borrowing at $16.4 trillion and rising and politicians unable or unwilling to agree on unpopular measures to end a decade of government deficits.

"So the politicians have chosen to kick the can down the road again and again," Xinhua said in a commentary. "But economics and common sense do not lie. People or governments can overspend for some time, but they simply cannot live on borrowed prosperity forever."

China is the biggest foreign buyer of U.S. Treasuries, with holdings of over $1 trillion.

The fiscal deal struck between the White House and Congress over the New Year holiday raised taxes on the richest Americans for the first time in decades, but deferred most of the tough decisions on spending cuts for another two months.

At the same time, the U.S. hit its borrowing limit and Congress will have to negotiate a higher debt ceiling in a matter of weeks.

Investors reacted to the news of a stop-gap deal with relief, sending stock markets and other riskier assets higher as the threat of big tax increases and savage spending cuts receded. But many market participants said the positive mood was likely to dissipate, given the number of unresolved issues and waning faith in U.S. politicians to find solutions, rather than simply engage in posturing.

Related: Economy isn't the real beneficiary of fiscal cliff deal

News of the U.S. agreement coincided with a rule coming into force in the European Union requiring eurozone member states to cap their structural deficits at 0.5% of gross domestic product from 2014 on.

The balanced budget rule is part of a "fiscal compact" struck at the height of the region's debt crisis in March. European leaders hoped it would restore market confidence in the euro and lay the foundations for future growth. But the austerity it requires threatens another year of recession in 2013.

Some commentators said events of the past few days showed the U.S. was equally unable to do little more than paper over the cracks in its economy.

Why I voted against the fiscal cliff deal

"The similarities between what we have just witnessed... and the endless rounds of bailing out Greece and others in Europe only go to highlight how vulnerable the global economy remains," wrote Jason Gaywood, a director at foreign exchange broker HiFX, in a note.

Britain's Guardian newspaper described the U.S. budget deal as "a depressing start to the year" - a shoddy compromise that neither delivered a much-needed boost to the economy nor restored order to the country's finances in the long run.

"If the agreement inked in the U.S. Senate this week is supposed to be an answer to something, then the question can't have been much good," it said in an editorial.

"America's government cannot continue forever with a system that spends one in every four dollars but taxes only one in every five."

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