Europe Reacts to Debt Deal

Global markets initially reacted favorably on Monday on news that the US debt-ceiling crisis is close to being resolved.

But it isn’t all champagne and roses. Ratings agencies have reacted negatively to the drawn out wrangling on Capitol Hill. And in Europe, some see the eleventh-hour package of spending cuts and tax hikes as too little, especially compared to the austerity packages some European governments have already approved.

Since World War II, the dollar has been the preferred mattress under which the world has stuffed its money. In times of crisis, investors take shelter in bonds issued by the world’s largest economy. But the partisan squabbling in Washington has made many Europeans nervous.

Christine Lagarde, president of the International Monetary Fund, told CNN this week that the dollar’s reputation has been tarnished. “There was a positive bias towards the USA, towards treasury bills,” Lagarde said. “That was the case historically. And the current crisis is probably chipping into that very positive bias. I mean it was unheard of that only six months ago that the United States could be under negative watch by the ratings agencies.”

Now, the rating agencies could downgrade US treasuries from their top-notch triple-A status. Economics reporter Richard Adams, of the British newspaper The Guardian, said the ratings agencies have reasons to be wary.

“My guess is that the structure of the cuts that are being talked about in America are in no way like austerity measures we seen in say, the UK,” Adams said. “For starters, the deal that was done last night, in the first year the cuts are relatively minor. And they’ve pushed the cuts further and further into the future. It’s over a ten-year horizon.”

So the debt deal may not appease the ratings’ agencies, and that seems only reasonable to many Europeans. After all, those same agencies have downgraded Ireland, Greek and Portugal to junk status. And their austerity packages have been more drastic than what the US is proposing.

Protests against spending cuts and price hikes in Greece have become a nearly daily occurrence. They’ve spawned a grass roots movement called “We Won’t Pay.” When Greek citizens refused to pay for bus tickets after yet another price hike, the police came and protestors began to chant angrily. Some would rather go to jail than pay.

Europe and the International Monetary Fund have just approved a second rescue package for Greece, but most investors expect Athens to eventually default on its debt. The euro’s weakness is one reason the US dollar may hang on to its privileged status.

There are still some stable currencies, but Adams said not one of them can replace the greenback. “I mean, there’s a limited number of Swiss francs that one can buy.”

The bottom line? Traders still consider the dollar to be a pretty safe bet.