Obama sees record deficit; gloom in Europe, Asia

WASHINGTON/LONDON - President Barack Obama was set to propose record deficit spending on Thursday in an attempt to drive the U.S. economy out of a recession showing every sign of deepening across the world.



By (Reuters)

Published: Thu 26 Feb 2009, 9:09 PM

Last updated: Thu 2 Apr 2015, 3:59 AM

Europe and Asia presented a grim picture, with Britain launching a huge scheme to insure “toxic assets” threatening major banks, euro zone economic sentiment slumping and Japan’s Finance Minister declaring a very bleak outlook for first quarter GDP.

The Royal Bank of Scotland, one of the worst hit by ‘toxic assets’ in Europe, reported the biggest loss in British corporate history -- 24.1 billion pounds ($34.3 billion) -- and said it would turn for help to the scheme that may cover up to 500 billion pounds’ ($712 billion) in bank liabilities.

The scale of government intervention across the globe would have been unimaginable a year ago, not least in the United States where there is strong resistance to state involvement.

President Obama will forecast a 2009 deficit of $1.75 trillion in his first budget proposal on Thursday, setting goals of overhauling the healthcare system and shoring up the U.S. economy. The plan must be approved by Congress.

The deficit would represent 12.3 percent of U.S. gross domestic product—the largest share since World War Two.

RETURN TO DISCIPLINE

“The deficit is huge, but it’s a necessary evil, and I think it’s already built into the market,” Tom Schrader, Managing Director, U.S. Equity Trading, Stifel Nicolaus Capital Markets, Baltimore, said.

U.S. stock futures rose one percent, pointing to a firmer start on Wall Street and European stocks were up almost 2 percent.

Two senior administration officials, speaking on condition of anonymity ahead of the release of the budget at 11 a.m. EST (1600 GMT), said Obama’s expensive policy goals would be offset by cuts elsewhere.

German Chancellor Angela Merkel, governing a country where huge stimulus packages are almost as controversial as in the United States, welcomed Obama’s pledge to return to fiscal discipline once the worst of the crisis is over.

“Obama has pointed to the way ahead - after the crisis we will return to a policy of saving, I welcome that hugely,” Merkel told a news conference in Berlin.

Obama says a big increase in government spending is crucial now to avoid economic catastrophe.

He faces a big challenge from some lawmakers.

“There’s no doubt that there are going to be things that we do that are going to create some political heartburn,” one official said. “But our fundamental mission is restore the health of the economy, put the budget on a better (footing)”

Federal spending is soaring as officials try to jolt the faltering economy with public works spending and tax cuts and bailing out the troubled financial industry.

Obama’s stimulus package and other efforts to revitalise the economy have done little to cheer Wall Street. U.S. stocks prices hit 12-year lows this week.

The budget will be watched with intense interest by both overseas governments and investors, who see the United States as a potential powerhouse to lead a global recovery.

VIEWS SPLIT

Japanese Finance Minister Kaoru Yosano said outlook for first quarter Gross Domestic Product was very bleak and hinted at the disarray befalling many over handling of the crisis.

“It’s important to support share prices for the economy but views are split over what steps to take,” he told reporters.

Britain’s Asset Protection Scheme will offer insurance to eligible banks against huge losses, and aims to get them lending again as British business and consumers cry out for credit.

“The object of this is to provide that certainty and that confidence that will maintain lending and that’s essential for each and every one of us,” said finance minister Alistair Darling.

Darling described the assets covered by the scheme in measured terms.

“These are things like commercial loans or mortgages which are worth less now that perhaps they were a few months ago which we hope will increase in value as we get through this recession,” he said.

Royal Bank of Scotland said it planned to place 325 billion pounds of assets in the new state insurance scheme.

“We are charting a path to standalone strength and with it the goal of justifying the support of the UK government and all our shareholders,” RBS chief executive Stephen Hester said.

Public resentment of bank executives who have drawn sizeable bonuses despite the failure of their banks is running high.

News that former RBS chief executive Fred Goodwin would receive a 650,000 pound pension has aroused anger in Britain.

Darling said he had asked him to forgo it.

Economic data on Thursday offered little hope than Europe can recover soon from recession.

Economic sentiment in the 16 countries using the euro fell to 65.4 points, the lowest since records began in 1985, from a downwardly revised 67.2 points in January. Deterioration was strongest in the industrial sector.A European Commission monthly survey showed inflation expectations among households fell again to 5 from 6 points and stagnated at -11 among firms.

German unemployment rose in February by 40,000 month-on-month in seasonally adjusted terms, the Labour Office confirmed. That took the adjusted jobless total to 3.311 million, giving an unemployment rate of 7.9 percent.


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