Putin Calls U.S. a “Parasite” Living on Debt
Policy + Politics

Putin Calls U.S. a “Parasite” Living on Debt

REUTERS/RIA Novosti/Pool

After President Obama and Congress agreed to a deal over the federal debt ceiling this weekend, Treasury Secretary Timothy F. Geithner called the heads of big companies and banks to get their views on the agreement. They told him it would soothe the markets, and that the greatest dangers to the global economy lay far from U.S. shores.

But the countries that have lent the United States trillions of dollars had a sharply different opinion, reacting to news of the deal — which calls for cutting the national debt by at least $2.1 trillion over a decade — with skepticism, if not outright disdain. The newspaper of China’s ruling party said that “debt problems remain unresolved” and have been “merely pushed off.” Russian Prime Minister Vladi­mir Putin said that the United States is a “parasite” that is “living in debt.”

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The head of China’s central bank welcomed the deal to raise the limit but urged Washington to avoid further steps that might hurt investors. “Large fluctuations and uncertainties in this market would undermine the stability of the international financial system and hinder global recovery,” Zhou Xiaochuan said in a statement posted on the central bank’s website.

Despite immediate relief in Washington that a government default had been averted, America’s creditors remain concerned that the political breakthrough did not translate into the far-reaching steps the United States needs to take to restore its financial health.

The agreement fell short even of the goals set by members of both U.S. political parties, who had said the government needs to find at least $4 trillion in savings to bring the national debt under control. Recent promises by political leaders that they would address the dangers posed by ballooning debt only raised expectations that were not met.

The lack of enthusiasm among investors for the deal was reflected in the U.S. markets. Stocks on Tuesday had their worst day in nearly a year, wiping out the gains made so far in 2011. Amid mounting fears that the U.S. economy could be slipping back into recession, both the Dow Jones Industrial Average and the Standard & Poor’s 500 indexes were down more than 2 percent.

The debt agreement, which won final passage in Congress on Tuesday and was signed by Obama, offers few measures to invigorate the anemic economic recovery.

Nor has the deal allayed all the concerns of credit-rating companies, which have threatened to downgrade the United States if the national debt is not brought to heel — echoing similar warnings made to Greece and other European countries facing debt crises.

“While the agreement is clearly a step in the right direction, the United States, as in much of Europe, must also confront tough choices on tax and spending against a weak economic backdrop if the budget deficit and government debt is to be cut to safer levels over the medium term,” Fitch Ratings said Tuesday.

Meanwhile, Moody’s Investors Service said it had confirmed the government’s AAA rating but placed it on “negative,” indicating it could still downgrade. Moody’s said it would cut the top-notch rating if lawmakers don’t follow through with their promises to bring spending in line with revenues. The firm also said a downgrade could come if the U.S. economy stumbles or interest rates rise significantly on Treasury bonds.

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Critical doubts

Foreign leaders are questioning whether Washington in the coming years will do more to tame the debt, or whether the creditors themselves will pay the price for U.S. indebtedness.

“The principal lesson that people are drawing around the world is that the American political system is deeply divided and will face serious difficulties in making choices in the coming decade,” said Jeffry Frieden, a government professor at Harvard. “People are asking the question, ‘Who’s going to bear the burden of the accumulated debt?’ Is it going to be the rich or the poor, or workers, or managers or creditors?”

As part of the debt agreement, Democrats were able to head off significant up-front changes to entitlement programs such as Medicare and Social Security, while Republicans blocked any immediate revenue increases. Both, however, could be recommended by a new committee of lawmakers that will produce a strategy later this year for further reductions in the debt.

“Putting public finances on a sustainable path will entail identifying further savings in entitlement spending as well as new revenues,” Christine Lagarde, managing director of the International Monetary Fund, said Tuesday.

An analysis by Barclays Capital on Tuesday said that the bipartisan deal, combined with weaker economic growth, would keep the national debt at 80 percent to 90 percent of the size of the total economy over the next decade. Economists say a national debt of that magnitude hurts business and reduces employment.

With the lifting of the debt ceiling, the Treasury Department will continue with routine auctions to raise new government funding. The department is planning to announce Wednesday how much it will raise in three-year, 10-year and 30-year bonds at auctions next week. On Monday, the Treasury said it would issue $331 billion from July through September.

So far, concerns about U.S. financial health have yet to be reflected in the market for U.S. Treasury bonds. While the government had to pay a little more than usual on Monday, the government continues to borrow money at extraordinarily low rates.

The dollar remains the global “reserve” currency, the basis for most transactions. Japan, with its limp economy, and Europe, with its multiple debt crises, offer no real alternative at the moment.

“There isn’t any place to go now but the U.S. dollar — not euros, not yen, not renminbi,” said Stephen Krasner, a Stanford University professor and former senior official at the State Department. “Despite all of what’s happened in the last months, there are no other alternatives.”

But this could change, and experts say the partisan wrangling over the debt could accelerate a move away from U.S. bond markets.

For several years, China, Russia and other emerging markets have been advocating that the dollar relinquish its primacy in global markets. A survey this summer by the Swiss bank UBS showed for the first that a majority of central banks believe the dollar will lose its status within 25 years.

“I would expect that process to, if anything, accelerate now,” Barry Eichengreen, a professor of economics and political science at the University of California at Berkeley, said in an e-mail. “What foreigners saw was narrow self-interest trumping all concern that the U.S. had a responsibility to stand by its debt obligations.”

Leaders in China and Russia who criticize the U.S. fiscal situation are often responding to domestic public opinion. (In China, a book about Chinese ownership of Treasury bonds, called “Currency Wars,” has been a bestseller.)

But even more moderate voices are acknowledging the trend. Lagarde, the IMF managing director, told CNN over the weekend that “there was a positive bias towards the USA, towards Treasury bills,” but “the current crisis is probably chipping into that very positive bias.”