Translated material
Greece on an American scale
State Deficits Concern Fed
The US Federal Reserve fears that the budget deficits of many American states have led to a situation similar to the European one. Increased financing threatens to further inflate external debt, while spending cuts could stall an already slow economic recovery.As Reuters notes, Fed officials have already said that high unemployment, the European debt crisis and losses in the commercial real estate market may take a back seat to problems related to public finances. Moreover, the main difficulties are experienced by regional governments, which must balance their budgets, unlike the federal budget, whose deficit is more than 10% of GDP.
California was the first state to face budget problems. In October 2008, at the height of the financial crisis, the once richest American state was virtually deprived of traditional sources of financing, including short-term loans. California continues to struggle with its budget deficit. In January, Standard & Poor's downgraded its credit rating. California's budget deficit could reach nearly $20 billion in the first half of 2011, and Gov. Arnold Schwarzenegger is considering raising taxes and further cutting spending. According to S&P, any of these measures could hit economic development.
"There's no choice but to cut spending or raise taxes, or they need to get a little more help from Washington," said Harm Bandholz, an economist at UniCredit in New York. In his opinion, public finances are the main risk factor for the American economy. However, as experts note, reducing spending could restrain economic growth by increasing unemployment. In the first quarter of this year, federal and regional governments have already cut spending by 3.9%, the sharpest decline since 1981.
“The situation in our country is very similar to the problems associated with public finances in Europe,” Atlanta Federal Reserve Bank President Dennis Lockhart said in late June. The federal government has been disbursing money from the $863 billion package to help states cope with the deficit. However, these funds are running out. Goldman Sachs economist Jan Hatzius believes that the economic growth forecast for 2011 will have to be revised if American states no longer receive budgetary support from Washington. “Strengthening fiscal discipline across the board at a time when the economy is struggling is a bad idea,” says Mr. Hatzius.
At the end of June, the San Francisco Fed published a study on the state budget crisis. The document notes that the budget deficit is unlikely to fit within previous forecasts and “will hinder economic growth.” At the same time, FRB experts emphasize that the state of the economy in this case is the determining factor: “It is known from history that the health of the national economy determines the health of public finances, and not vice versa.”
This week the minutes of the last Fed meeting, held at the end of June, will be published. The central bank is expected to lower its economic growth forecast mainly due to disappointing statistical data and concerns about a slowdown in the European economy. Mr. Bandholz believes the Fed will be reluctant to provide more information about the state of the federal and regional budgets, since this lies in the area of fiscal policy, which is the responsibility of the Treasury Department. However, these issues may require more attention if problems begin to worsen. This week, the Fed may receive further evidence that the economy began to stall over the summer. Experts predict weak retail trade performance in June and a slight decline in industrial production. In addition, Chinese statistics will be published this week, which, as experts predict, may show a decrease in China's GDP growth in the second quarter to 10.5% from 11.9% year on year.