An embarrassment for US, but experts say damage won’t last

Associated Press

WASHINGTON

It’s going to take a lot more political bungling to do any permanent damage to America’s reputation or wreck its financial markets.

The U.S. government’s partial shutdown and a near-miss with a debt default were a worldwide embarrassment that distracted political leaders and likely slowed the economy.

Yet the world still runs on U.S. dollars. Foreign investors still see Treasury debt as the safest place to put their money. And foreign companies still view the United States as an ideal place to do business.

“It’s a paradox,” says Eswar Prasad, a specialist in international economics at Cornell University and the Brookings Institution. “Even when the U.S. is at the center of the financial turmoil, there is no other place that investors can turn to for safety.”

Congress certainly stirred up financial turmoil the first two weeks of October with a duel over President Barack Obama’s health care law.

But investors didn’t panic. The yield on the benchmark 10-year Treasury note was 2.62 percent Sept. 30, a day before the shutdown began. The prospect of a default should have driven the yield much higher. Instead, the yield barely budged. It never rose above 2.73 percent.

For all the hand-wringing in Washington about a budget crisis, Christoph Kind, head of asset allocation at Germany’s Frankfurt-Trust investment firm, notes that the U.S. government’s budget deficit has been sinking.

“The fiscal situation in the U.S. is improving,” Kind notes. “The budget deficit is going to be below 4 percent of [the U.S. economy] this year, and it’s declining steadily.”