WASHINGTON Aug 2 With U.S. congressional
elections approaching, the actions of legislators and the
administration will be watched closely by investors in the
coming months. Here are the main political risks to watch in
the United States.
Republicans are likely to gain ground when all 435 seats in
the House of Representatives and 37 of the 100 seats in the
Senate come up for grabs in the Nov. 2 midterm elections.
The high jobless rate is dragging on the Democrats' poll
ratings and Republicans might win control of the House and
probably pick up seats in the Senate. [ID:nN2947678]
That would make it difficult for Obama to win the kind of
legislative successes he had in his first two years in office.
What to watch:
-- Obama will probably have to deal with resurgent
Republicans in Congress. The question is whether he will be
able to work with them to slash the budget deficit and boost
job hiring or whether politicians will be stuck in gridlock
while the economy languishes. An early and crucial test of this
will come in December when a bipartisan commission makes
recommendations on how to cut the deficit.
-- Republican electoral gains are likely to be welcomed by
financial markets keen to dampen Obama's zeal for regulating
business, like healthcare reform and the crackdown on Wall
Street. While there are always other factors such as company
earnings to push shares, historically the S&P 500 index does
well in the year after midterm elections regardless of the
result partly because the third year of a presidential term is
seen as a stable period politically. The last time the
Republicans did well in a midterm vote under a Democratic
president was in 1994. Stocks rose 25 percent in the 12 months
from October that year.
-- Republicans have threatened to repeal Obama's healthcare
and financial regulation laws but that is improbable as they
would need a two-thirds majority in both the House and Senate.
Legal challenges to healthcare reform by states could win more
Deficit projections have soared to $1.47 trillion and
public debt is at $13 trillion. The Republicans doing well in
the election is seen as positive for deficit reduction. No one
party then has to take the blame for tough cuts.
What to watch:
-- Despite the hefty debt burden, the U.S. Treasury has had
no difficulty so far finding willing buyers of government
bonds, and interest rates remain very low. The concern is that
buyers may one day lose faith in politicians' willingness to
put finances back on a sustainable path. They might refuse to
cheaply finance U.S. spending, and borrowing costs would spike.
That could also make it more expensive for companies and
consumers to borrow, slowing the economy. In an unlikely
doomsday scenario, the United States would have so much
difficulty attracting debt investors that it would be forced
into taking stern measures to curb spending and raise taxes.
One worry would be that the Federal Reserve might begin
printing money to buy Treasury debt, which could devalue the
dollar and drive up inflation. Political gridlock is often
welcomed by markets when an economy is doing well but Wall
Street would punish failure to reach agreement on the deficit.
-- A bipartisan commission will make recommendations by
December on how to reduce the deficit. A leading Democrat on
the panel has suggested a cap on government spending, putting
him more in line with Republican thinking and increasing the
chances of the commission producing feasible ideas.
-- In the end, implementation of the commission's ideas by
Congress in 2011 is everything and bipartisan cooperation will
be needed. Republicans will push for spending cuts while
Democrats are expected to seek tax increases.
-- Austerity measures. While markets are keen on keeping
the deficit under control, an austerity program that crimps
consumer spending could hit company earnings or stunt economic
-- New White House budget director Jack Lew, a Clinton
administration veteran who is trusted by markets and
Republicans. He will set the tone for deficit reduction.
BUSH-ERA TAX CUTS
The U.S. Congress is likely to vote by the end of the year
on whether to extend tax cuts dating back to George W. Bush's
presidency. Letting the cuts expire would help plug a hole in
the deficit but would be unpopular with voters.
What to watch:
-- A tax on company dividends for upper income groups that
will shoot up to 40 percent from 15 percent now if lawmakers do
not extend the cuts. Capital gains taxes would also rise from
15 to 20 percent.