What is the “fiscal cliff “ that has rattled the global markets?

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What is “fiscal cliff “ that has rattled the global markets?
US markets on Wednesday were rattled, dragging world indices with it, as fears on the US "fiscal cliff" and its handling by Obama re-surfaced.

What is "fiscal cliff"?

"Fiscal cliff" largely involves Bush-era tax cuts and major across-the-board spending cuts that are estimated to total $800 billion, which will take effect from January 1, 2013, unless lawmakers in the US, do something to change the course.

The fiscal cliff requires a sharp cut in a host of benefits and economists warn that it could lead to prolonged recession in the US, if there is no intervention.

The problem as far as the "fiscal cliff" is concerned is that the Demoracts and Republicans do not see eye-to-eye on various cuts and this has led to an impasse, which if allowed to carry on could lead to an economic catastrophe in the US. While President Obama wants higher taxes on the rich, the Republicans have refused to budge on the matter. There is a host of disagreement on various issues, and the question now is: "who will blink first".

Lawmakers must choose whether to leave those measures in place, replace some or all of them, postpone them or cancel them entirely. Their decision will be crucial as it could affect the US economy and the US debt burden.

The Los Angeles Times quoted Fitch ratings as saying that there would be "no fiscal honeymoon" for President Obama, warning early Wednesday that the U.S. probably would lose its AAA credit rating if the White House and Congress don't address looming tax increases, spending cuts and the fast-approaching debt ceiling.

"Failure to reach even a temporary arrangement to prevent the full range of tax increases and spending cuts implied by the fiscal cliff and a repeat of the August 2011 debt ceiling episode would mean that the general election had not resolved the political gridlock in Washington and likely result in a sovereign rating downgrade by Fitch," the company said.

Inability to agree over fiscal measures and debt reduction could also drag the world economy down along with the US.

The day after Obama was elected the US Dow Jones came crashing down, losing more than 2.36% on fears of the impending "fiscal cliff". How lawmakers from the Democrats and the Republicans will agree on crucial issues before the December 31, 2012 deadline remains to be seen.


Read more about: fiscal cliff
Story first published: Thursday, November 8, 2012, 8:54 [IST]
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