Expect fudged deal to stave off fiscal cliff threat: BGC

David Buick, partner, BGC explains that with time running out for the US President and the Republicans to arrive a resolution of the fiscal cliff, the expectations that a fudged deal will be presented are high. Though the US fiscal cliff may not come to pass, the estimate of the possible damage it could cause will bring all parties concerned to the negotiating table, adds Buick.

Below is an edited transcript of the analysis on CNBC-TV18  Q: What are your expectations of an agreement being reached?
A: Analysts and the investor-community have come to accept the jerrymandering that goes on in US politics, particularly with the extraordinary situation of the Republicans holding a majority in Congress. The USD 16-trillion budget deficit is just completely unacceptable and I think the agreement will be a fudged deal. I doubt that there is time to come to a resolution between now and next Monday.
I think considerable progress which hitherto has not been forthcoming I suspect will be announced after meetings between President Obama and John Boehner and their advisors. Everybody agrees that it is essential that the US economy is not too seriously damaged by the differences in opinion. The US obviously wants to protect its 'AAA' rating.  It has the most enormous debt, the most liquid of assets in the US Treasury, is hugely reliant upon China and doesn’t want to send the signals that the government is not getting its act together fiscally.
Therefore a fudged plan will manifest itself. Whether there is some compromise between whether it's USD 250,000 a year or a million dollars a year or whether high rates of tax are implemented, remains to be seen. But one thing is for certain, the Republicans are going to play hardball if the US government doesn’t show or stops showing its reluctance to cut this huge debt because it is unsustainable and it could severely damage the United States. Experts say what is happening now could cost as much as half a percent of GDP. If an agreement was not reached on the debt situation and the US economy fell off the fiscal cliff, the damage could be absolutely dramatic. But in my opinion, it won’t happen. Q: In your opinion if the deal doesn’t come through by Monday, are all of the risk assets due for a correction?
A: Not particularly, because some of the froth has been seen to come off in some of the US equity markets in the course of the last two or three weeks. The expected Santa rally hasn't occurred yet because of this cumulo-nimbus cloud of the threat of the fiscal cliff being not negotiated. But everybody realises the ramifications of not doing so. So, I think it’s already in the price.
If we come with just a statement from the US government and from the Republicans that matters are in hand and that we hope to reach some sort of settlement soon, I think that market will accept that. As long as it is implemented within the first two weeks in January, regardless of what everybody says, by the end of December the US economy will fall off the fiscal cliff and USD 600-billion worth of tax-increases will be implemented and USD 100-billion worth of spending cuts will be enforced. I don’t think that will happen.
I just think the threat is there and it is going to force people to the negotiating table. I think that the general demeanour of Nancy Pelosi is arrogance personified.
Also, I think the President of United States though he has the greater majority, is slightly diffident towards reaching an agreement quickly and effectively. I think that needs to be attended to. Q: So, the market will wait for about two weeks' time before it decides to correct on the development on the resolution of the US fiscal cliff?
A: That’s what I think will happen and if it doesn’t, God help us because it will be chin-up time. But I don’t think that will happen and good sense will prevail. It is just very irritating that we have to go through this game, for want of  a better expression, every time there is an impasse in Congress between what the prevailing government wants and what Congress is prepared to give them. Q: As a fund manager would you wait to buy risk assets on the assumption that the contraction if any, has been priced-in?
A: Basically, I am a broker but I have contacts with lots of fund managers and they consistently tell me that they think that equities is really the only asset in town. They believe that there will be a recovery process throughout the world and it will be very mixed. Reflecting on my clients thoughts, I am very resistant on Europe and see Europe remaining in recession for two years. The Mediterranean countries could easily drag down France significantly and Germany may find the going tougher than it thinks.
I am enjoying the resilience that seems to be taking place in China. Also it’s nice to see India getting on top of its problems. All in all, if the United States resolves the fiscal problem, I think equities could well rally, depending on various parts of the world, somewhere between 10-15 percent.