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From 'cliff' to 'abyss': World reacts to U.S. budget deal Add to ...

These are stories Report on Business is following Wednesday, Jan. 2, 2013.

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Markets rise as 'cliff' fiasco averted
Global markets surged today on relief over the so-called fiscal cliff, but observers warn that the scramble for a U.S. budget deal left unresolved key issues that will return to haunt investors down the road.

For now, though, stocks, commodities and some currencies like the Canadian dollar rallied in the wake of the agreement to head off the combination of tax hikes and spending cuts that threatened to plunge the U.S. back into recession.

“Markets turned immediately and significantly risk-seeking as it became apparent that the House had passed the bill removing or delaying most of the immediate impact of the fiscal cliff,” said currency strategist Adam Cole of RBC Europe.

The basic fact that the cliff has been avoided has been enough for markets for now, though there is still plenty of unfinished fiscal business to be completed over the next couple of months,” he added in a research note.

“The key parts to the bill are tax rates rising on household incomes above $450,000, the 2-per-cent payroll tax holiday expiring, and a delay to sequestration for two months.”

Hong Kong's Hang Seng surged 2.9 per cent, and major European exchanges climbed by more than 2 per cent. The optimism continued as North American markets opened, with the S&P 500, Dow Jones industrial average and Toronto's S&P/TSX composite all rallying.

Left hanging after Congress ended the deadlock, though, are several issues, including cuts of more than $100-billion that become an issue again in a couple of months. As well, the U.S. will still have to raise its borrowing ceiling.

Here are comments from some observers after the Senate and House votes:

“The bill handed to the House by the Senate contained very few cuts to spending and had the House Republicans openly discussing whether to amend the bill and send it back to the Senate. In the end, however, the bill passed by 257 votes to 167. However, with the debt ceiling due to be reached within the next couple of months and the bill only delaying sequestration by two months, the Republicans still hold some leverage and demands for spending cuts will likely be a feature of the fiscal debate in Q1.” RBC’s Mr. Cole

“Fiscal wrangling is far from over but the ‘cliff' has been punted down the Potomac. Sequestration and debt ceiling negotiations will come down the river in short enough order to keep us busy, and the path for the U.S. debt level is now higher, which will concern the rating agencies, but the market reaction today is unequivocally ‘risk on.’  The initial reaction of our U.S. economics team to the ‘deal' is that ceteris paribus, it boosts 2013 GDP growth by around 0.5 per cent, while taking the budget deficit to 6 per cent GDP. U.S. 2013 GDP growth is now likely to be in a 2 per cent to 2.5 per cent range, and the chances of [second half] growth exceeding 3 per cent are significant.” Kit Juckes, chief of foreign exchange at Société Générale

"The U.S. budget agreement is likely to prove [U.S. dollar] negative in the medium term as it averts the fiscal cliff today but fails to provide a credible medium-term fiscal plan and instead forces major issues, like the debt ceiling and $110-billion in spending cuts, out to March 1, and highlights how challenged the U.S. political system has become. In addition, it potentially lays the foundation for a rating agency downgrade. The details of the plan (passed 257 to 167) includes a tax increase from 35 per cent to 39.6 per cent for individuals earning over $400,000 or households earning over $450,000 and increase on capital gains and dividend tax from 15 to 20 per cent; the 2-percentage-point reduction in payroll taxes expires; taxes increase on estates over $40-million; unemployment benefits are extended until the end of the year." Camilla Sutton, senior currency strategist, Bank of Nova Scotia

“It was hardly a smooth ride, and fears of a last minute, last-ditch attempt to throw in spending cuts provided plenty of drama, but U.S. lawmakers were able to put together a deal that averts the fiscal cliff. Cynics will point out that another argument has been booked in for two months’ time, when the debt ceiling comes up for debate, and Republicans will be looking to make progress on the spending cuts that haven’t featured in the New Year deal. But for now markets are just relieved that we moved into 2013 with some sort of deal.” Chris Beauchamp, market analyst, IG

"The [Congressional Budget Office's most recent estimate of the combined fiscal cliff measures was $503-billion for FY2013 (or $671-billion on a CY2013 basis). The act averts about $330-billion of these measures, or $440-billion on a CY basis, resulting in a net fiscal drag of about 1.5 per cent of nominal GDP for 2013 (nearly half of which reflects the increase in payroll taxes). This is at the top end of our working assumption ... but the final drag figure is still not in as the sequestered spending cuts were only postponed for a couple months. Dealing with these cuts (and associated tax and entitlement reform) along with raising the debt ceiling (which was technically hit on Monday but around which Treasury can manoeuvre for a couple months) points to potentially more fiscal battles on the horizon. For now, however, we can relish in the fact that the fiscal cliff was averted, political compromise was achieved (yes, 85 of 236 House Republicans voted in favour), and America’s finances are staring to move to a firmer footing."  Michael Gregory, senior economist, BMO Nesbitt Burns

"The GOP is likely simply reloading for the next round. That's when this revenue focused deal sets in motion another fiscal cliff to be hit when the agreement’s agreed upon two-month delay in spending cuts coincides with when the U.S. Treasury figures the just passed debt ceiling will become binding. That will arrive after taking extraordinary measures to delay the debt ceiling's effects before default and a government shutdown become renewed risks. Buy the risk trade now, but don't get greedy and take your profits before the Cliff Part II becomes a cheesier Hollywood remake of the original." Derek Holt, Dov Zigler, Bank of Nova Scotia

“The current legislation leaves considerable economic and policy uncertainty: First, it lessens, but does not remove uncertainty related to fiscal consolidation. The lack of clarity on spending cuts could result in a persistence of underinvestment by firms … Second, negotiations related to the deferral of the $110-billion in spending cuts will coincide with when the debt ceiling limit is again maxed out, as the Treasury will have likely exhausted extraordinary measures by that time. This may turn into a déjà-vu of August 2011, when the lifting of the debt ceiling was used as the bargaining tool that ultimately created the fiscal cliff measures … Third, until we know what measures will take place on spending cuts, the trajectory of the debt-to-GDP ratio will continue to worsen. Fourth, whatever deal ultimately is made over the next two months on discretionary and defense spending cuts, reform still needs to occur with entitlements ... Entitlement reform was not part of the near-term fiscal cliff measures, but the debt-to-GDP ratio cannot be stabilized in its absence unless draconian measures take place elsewhere.” Beata Caranci, James Marple, Toronto-Dominion Bank

“For some keen observers, the United States, with a total government debt of nearly $16.4-trillion, has a bigger devil to fight with than the ‘fiscal cliff’ as far as its long-term fiscal sustainability is concerned … As the world's sole superpower, the United States is clearly not Greece. The greenback is still the dominating currency in the global monetary system. Washington can still borrow at low costs even when some smaller European economies are completely shut out of the global bond market. 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 … If you call over $600-billion of tax increases and spending cuts a ‘fiscal cliff,’ the total U.S. government debt has created nothing but a ‘fiscal abyss.’” Chinese state news agency Xinhua

Avis strikes Zipcar deal
Whether it’s by the month, the day or the hour, Avis has decided it wants to rent it all.

Avis Budget Group Inc. today struck a $500-million (U.S.) deal for Zipcar Inc., citing the fact that car sharing is now a $400-million business in the U.S. and is expanding globally.

Zipcar, with more than 760,000 members, now operates in several Canadian, American and European cities, and, it noted, more than 300 college and university campuses.

"By combining with Zipcar, we will significantly increase our growth potential, both in the United States and internationally, and will position our company to better serve a greater variety of consumer and commercial transportation needs," Avis chief executive officer Ronald Nelson said in a statement as he unveiled the $12.25-a-share cash offer.

"We see car sharing as highly complementary to traditional car rental, with rapid growth potential and representing a scalable opportunity for us as a combined company.”

Cold comfort?
Pakistan has come up with a novel scheme it hopes will help lure business travellers in the face of terrorist violence.

The government is offering insurance for foreign business people. As in, you’re taking a huge risk here, pal, but at least you’ll be covered.

Several governments, including Canada’s, advise against travel to Pakistan in the wake of terrorist attacks that, according to Agence France Presse, have killed more than 35,000 people since the Sept. 11, 2001 attacks on the United States. Insurance can be prohibitive, or impossible to arrange, for people travelling to countries on a try-not-to-visit list.

The Canadian government, for example, “advises against non-essential travel to Pakistan due to the unpredictable security situation and the threat of terrorist attacks.”

So Pakistan’s state-owned National Insurance Co. now has a “travel insurance policy (including terrorism cover) for visiting foreign buyers or their foreign agents.”

“Any private or public entrepreneur inviting foreign businessmen or investors will now be responsible for providing insurance cover to their guests through the National Insurance Company (NIC),” commerce ministry spokesman Abdul Kabir Kazi told AFP.

“We have launched the scheme immediately and asked the foreign office to dish out information about the scheme to all Pakistani missions abroad to benefit foreign investors and businessmen.”

According to the document posted online, the insurance is “in respect of sickness/accidental injury/accidental disability/accidental death occurring during the period of insurance and within territory of Pakistan including accidents due to terrorism acts.”

Included is a four-part section that I’m not sure would entice all that many travellers: “The effect of this action will be to strike terror or create a sense of fear and insecurity in the people, or any section of the people, any act or thing by using bombs, dynamite or other explosive or inflammable substances, or such firearms or other lethal weapons as may be notified, or noxious gases or chemicals, in such a manner as to cause, or be likely to cause, the death of, or injury to, any person or persons.”

The premiums are $75 (U.S.) a week or $250 a month for the “classic” package, and up to $225 a week and $500 for “premier” coverage. Those cover accidental death to the tune of $200,000 for classic and $500,000 for premier, as well as “permanent total disability compensation,” medical expenses and the “actual cost of air ticket” if you have to leave the country (presumably alive).

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