By Alistair Bell
WASHINGTON, April 10 (Reuters) – Tension with North Korea
over its threats of war, fights in Congress over fiscal issues
and a shift in energy policy are among the main political risks
at the start of U.S. President Barack Obama’s second term.
BUDGET WOES
Fights in Congress over the budget have dominated U.S.
politics since Republicans gained majority control of the House
of Representatives at the beginning of 2011.
At the heart of Washington’s persistent fiscal crises is
disagreement over how to slash the budget deficit and gain
control of the $16.7 trillion national debt, bloated by wars in
Iraq and Afghanistan and government stimulus for the ailing
economy.
Government red ink also rose over the last decade after the
enactment of tax cuts in 2001 and 2003 secured by President
George W. Bush.
Obama lays out a statement of intent to cut the deficit when
he presents his budget proposal on Wednesday. He will offer cuts
to Social Security and other benefits programs to try to
persuade enough congressional Republicans to agree on a broad
deficit-reduction deal.
From a long-term perspective the worry for U.S. government
bonds is that debt and deficit levels will undermine the world’s
opinion of the United States as a safe haven, and attendant
credit downgrades would eventually cause U.S. borrowing costs to
rise as investors demand more for what is seen as greater risk.
Corporate borrowing costs could also rise if yields on safer
government debt move higher. In addition, talk that municipal
debt may lose its tax-exempt status during budget negotiations
would hit those bonds as part of their appeal comes from their
tax-advantaged status.
But in the short term, U.S. government bonds could actually
see a rally as a result of investor desire for safety if the
budget crisis begins to spiral out of control.
What to watch:
– The debt ceiling. The federal government’s authority to
borrow new money runs out on May 19, although the Treasury
Department is likely to take extraordinary measures that would
push that deadline back to July or August. Fitch Ratings has
warned it might downgrade the U.S. sovereign rating if Congress
fails to increase the debt limit in a timely way. The debate
could become fraught, as it did during debt limit fight in 2011,
as Republicans plan to demand a dollar in spending cuts for
every dollar of increase in the debt limit. That said, the debt
ceiling debate is seen as an opportunity to work out a modest
deficit-reduction deal in Congress.
– Sequestration. The $85 billion across-the-board government
spending cuts that began on March 1 dropped off the political
agenda as lawmakers turned their attention to immigration and
gun control. But the cuts are now beginning to bite and might
last until the end of September, damaging the economy. Delta Air
Lines and US Airways Group said reduced
last-minute bookings by government workers cut their unit
revenue in March, sparking a sell-off in airline stocks. Lower
government sales are also hitting tech companies like network
equipment maker F5 Networks Inc. Sequestration might be
lifted as part of any deficit agreement in Congress over the
summer.
NORTH KOREA
North Korea’s threats of war – including a pre-emptive
nuclear strike against the United States – have created
headlines in recent weeks but few in Washington and Seoul
believe conflict is imminent. All the same, Pyongyang has a
history of defying the rest of the world with nuclear tests, and
in 2010 it lashed out in a pair of deadly attacks on a South
Korean warship and an island, killing 50 people. Moody’s credit
rating agency says the rise in North Korean rhetoric and the
re-starting of a nuclear plant to make fissile material had made
the current situation “more dangerous” and negative for South
Korean assets. The South Korean won currency dipped to a fresh
8-month low on Tuesday, and South Korean stocks have hovered
around their lowest point in four months due to selling by
foreign investors worried about the diplomatic tension.
What to watch:
– Whether North Korea will fire a test missile in the coming
days. Pyongyang has reportedly placed two of its
intermediate-range Musudan missiles on mobile launchers and
hidden them on the east coast of the country. Adding to the
tension created by the recent threats, mid-April is
traditionally when the North holds celebrations to mark the
birth date of its founder, Kim Il-Sung – grandfather of the
current leader, Kim Jong-un. The United States is ready to shoot
down a missile if it threatens South Korea, Japan or the U.S.
territory of Guam, American officials say. And any North Korean
military strike on South Korea is likely to bring “proportional
retaliation” by Seoul.
– Holding a fourth nuclear test. A South Korean newspaper
reported on Monday that there was movement of manpower and
vehicles at the North’s atomic test site that mirrored earlier
blasts, although such a test does not appear imminent. And the
North has not set a no-fly zone yet, which it does every time it
does a ballistic missile test. Nor has Pyongyang shown any sign
of preparing its 1.2 million-strong army for war, indicating the
threats are partly intended for domestic purposes to bolster
Kim.
ENERGY
U.S. energy policy is shifting as newfound supplies push the
country from fuel scarcity to abundance. The Obama
administration is considering whether to allow more exports of
natural gas, and a decision could come this year.
Opponents of exports say the shipments could spike fuel
prices for manufacturers and for home heating. But drillers,
including Exxon Mobil Corp and Sempra Energy,
would like access to new markets, especially with low prices
domestically for the fuel.
As U.S. oil output hits the highest level in 19 years,
pressure to export crude is also rising, though a nearly 100-
year-old law requires companies to get special licenses to do
so.
The oil boom is also giving Obama plenty of time to decide
whether the United States should build a $5.3 billion pipeline
to transport more crude from Canada. The project has been
stalled for years due to concerns about its impact on the
environment.
But it is uncertain whether the executive actions Obama says
he could take on emissions would go beyond tougher standards on
coal-fired power plants. Climate regulations on coal could hit
miners and power companies.
What to watch:
– A decision by mid-year by the administration on whether to
approve TransCanada Corp’s Keystone XL oil pipeline
that would bring oil sands crude from Alberta to refineries in
Texas. The odds of approval rose when the U.S. State Department
said in March that the proposed pipeline would not likely
accelerate Canadian oil sands production, and by extension, fuel
a spike in greenhouse gas emissions. Environmental groups have
asked the Obama administration to hold off on a decision perhaps
beyond this summer so that a spill of Canadian oil from a
pipeline in Arkansas can be studied.
– Obama’s nominee to head the Environmental Protection
Agency, Gina McCarthy, and his pick for energy secretary, Ernest
Moniz, face tough confirmation hearings in the Senate this week
. McCarthy could be in the firing line from
Republicans who have been pressing her about the agency’s plans
to regulate carbon emissions. If confirmed, air quality expert
McCarthy would likely push for putting emissions limits for
existing power plants. Moniz will almost certainly be questioned
on his views of allowing U.S. companies to export large amounts
of natural gas. Lawmakers will likely also press him on how he
plans to handle the department’s controversial loan guarantee
program for energy development.
IRAN
The dispute over Iran’s nuclear capacity might come to a
head this year. Israel has suggested it might attack its
neighbor to curb what it says is Tehran’s ambition to build a
nuclear bomb. Oil prices would likely soar and the United States
would be exposed to revenge attacks by Iran and its allies in
the region.
What to watch:
– The red line. Israeli Prime Minister Benjamin Netanyahu
has set a mid-2013 “red line” for denying the Islamic republic
the fuel needed for a first bomb. The red line was dramatically
illustrated by Netanyahu at the United Nations last year with a
drawing of a bomb. Israel says it will not allow Iran to have
enough uranium enriched to a fissile concentration of 20
percent. Even then, Iran would need to enrich the fuel further
to have the basis for a bomb, a step Netanyahu said could be
taken rapidly. While scientists differ on how much uranium is
needed to have the ability to quickly make a bomb, analysts say
the Israeli limit figure is believed to be 240 kg of uranium
enriched to 20 percent.
– Talks. Six world powers – including the United States –
and Iran failed again to end the deadlock in nuclear talks last
week. While no new date for a meeting was set, Western nations
see grounds to keep talking to Tehran.
(Additional reporting by Tim Gardner, David Gaffen, Richard
Cowan and Paul Eckert; editing by Xavier Briand)
