News Analysis: Syria worry overshadows U.S. fiscal wrangle amid fluctuating global markets

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News Analysis: Syria worry overshadows U.S. fiscal wrangle amid fluctuating global markets

By Xinhua Writer Jiang Xufeng (Xinhua) 08:31, September 09, 2013

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WASHINGTON, Sept. 8 -- As global financial markets are reeling under a potential U.S. military action against Syria, President Barack Obama is gearing up for a new round of budget fight in coming weeks.

WOBBLING MARKETS

The possibility of a U.S. military strike against Syria has triggered concerns over oil supplies in the Middle East, where about one third of world's crude is pumped. Russian President Vladimir Putin said Friday that Russia would help Syria in case of an external military attack during the leaders' summit of the Group of Twenty (G20) held last week in St. Petersburg, Russia, driving Brent crude for October delivery to close at 116.12 U.S. dollars a barrel, near a six-month high of 117.34 dollars per barrel set on Aug. 28.

Any contemplated military action on Syria would not have any " significant effect on U.S. economy or the world economy," said C. Fred Bergsten, director emeritus of the Washington-based Peterson Institute for International Economics, in a recent conference call, but adding that a U.S. military action might lead to a trail of events in the Middle East, which will affect the oil market.

When Obama said on Aug. 28 that he was weighing a "limited" military strike against Syria, the spot gold price rose to about 1, 430 dollars per ounce in the day, a new high in more than three months. U.S. stock market also registered its steepest monthly decline in August since May 2012.

The turmoil in the global financial markets in recent weeks and months have many causes, including the Fed's decision to taper its third round of quantitative easing program or QE3, recent upbeat economic data from China, a stabilizing economy in the eurozone, as well as a potential U.S. military strike against Syria that has a contained and short-lived impact on markets, Hung Tran, Executive Managing Director at the Institute of International Finance, told Xinhua.

FED MOVE IN FOCUS

Experts reckoned that market jitters caused by a possible military strike on Syria and the latest weak job report might increase the chances that top Fed officials will delay scaling back QE3 until December or announce a small-scale cutback instead of a big one at the upcoming policy meeting of the Federal Open Market Committee (FOMC) slated for Sept. 17-18.

The newly-added jobs in the United States in August fell short of market expectations, with unemployment rate ticking down 0.1 percentage point from the prior month as more people dropped out of the labor force, latest figures from the Labor Department revealed.

Since the onset of the financial crisis, the Fed has completed two rounds of quantitative easing programs, dubbed as QE1 and QE2. It has bought more than 2 trillion dollars of U.S. government debt, agency mortgage-backed securities (MBS) and other assets, to push down long-term interest rates and bolster lending activity.

While military action in Syria alone seems unlikely to be central to the Fed thinking about tapering QE3 in September, the Fed is facing the prospect of a combination of events that could pose risks to financial markets and to household and business confidence, David Stockton, former chief economist of the Fed, told Xinhua.

"I do not think that the prospect of military action in Syria, by itself, would be enough to prevent the Fed from beginning to taper in September. However, if military action has started by the time of the September FOMC meeting and that action has created significant volatility in financial markets, the Fed will need to take that into account in making their decision and could opt to wait a while longer," Stockton contended.

EFFORTS TO BOOST FISCAL SUSTAINABILITY DELAYED

U.S. lawmakers will continue to debate a possible military attack on Syria when they resume sessions Monday after summer recess, overshadowing the looming fiscal fight from the spotlight. The Obama administration needs congressional approval of its budget plan for the 2014 fiscal year beginning Oct. 1 and of raising the Treasury Department's borrowing authority by mid- October to avert a default.

If President Obama and Congress spend all their time in grueling themselves on the issue of Syria in coming weeks, "it will be even less likely that they will come up with an answer to the fiscal problem that they will talk about on a timely basis," Bergsten said.

The debate about the U.S. military involvement in Syria might cause lawmakers to think whether they want to keep the ongoing " sequester" -- or spending cuts. It's difficult to know how this outcome here would affect that. But certainly it will have some effect on that, said Roger Altman, former U.S. Deputy Treasury Secretary, in a recent interview with Bloomberg TV.

Roughly 85 billion U.S. dollars of spending cuts hit various U. S. governmental departments starting March 1, which was part of the fiscal deal inked between Democrats and Republicans in 2011 to slash ballooning governmental deficit and enhance U.S. fiscal sustainability. Without congressional action, more than 100 billion dollars of spending cuts would affect the federal government in the next fiscal year.

As Obama is awaiting approval of the Capitol Hill to authorize a military strike against Syria, the Syria issue will complicate the fiscal challenges facing U.S. lawmakers, adding pressure to an already packed September agenda of fiscal disputes. U.S. Congress may have to pass a short-term stopgap bill to fund the government for weeks or months, leaving bigger fiscal battles later.

The Syria issue might increase the risk of a failure of the United States to deal with its fiscal problem "in a timely way," therefore adding to market uncertainty, Bergsten cautioned. ( Xinhua Writer Gao Pan contributes to the story.)