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European debt crisis a grim reminder for US

WASHINGTON, May 16 – The European debt crisis is a stark reminder for the United States to tackle its own massive budget deficit, which some fear will remain at trillion-dollar levels for many years to come.

President Barack Obama, who inherited the flood of red ink from his predecessor George W. Bush, has promised to urgently ease the deficit.

But some analysts believe his administration is not taking the crisis seriously.

Just three days ago, Obama and his Treasury chief Timothy Geithner prodded European leaders grappling with a balloning debt crisis to put their house in order.

Then data last Wednesday showed the US government had suffered its 19th consecutive month of red ink in April, the highest ever for that month.

"The irony of American officials telling Europeans to tighten their belts was accentuated" by the fresh deficit data, Ed Yardeni, chief investment strategist for Yardeni Research said.

The April deficit brought the shortfall for the first seven months of the 2010 fiscal year ending September 30 to 799.68 billion dollars.

The White House has forecast the 2010 deficit will swell to a new record of 1.555 trillion dollars due to massive spending to stimulate recovery from the worst recession in decades.

As debt contagion fears grip Europe sparked by problems in Greece, analysts warn the United States has only limited time to forge a credible plan to end its own fiscal woes.

"Interestingly, however, the sense of urgency about near-term fiscal tightening, so evident this week in the UK and euro area, is largely missing in the US," Dean Maki, head of Barclays Capital US economic research, noted.

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Partly this was because investors tend to flock to rather than keep away from US Treasury bonds when risk aversion spiked, he said.

The US dollar, which has risen rapidly against the embattled euro amid the European debt crisis, is the premier reserve currency and viewed as a safe haven during financial turmoil.

The flight to US Treasuries was also due to a stronger pickup in US economic growth from recession, "which if sustained makes a given level of the deficit-to-GDP ratio easier to finance," Maki said.

"However, we doubt the US can get by indefinitely without serious deficit reduction efforts," he said.

One "interesting test" would come at year-end, when the Bush-era tax cuts of 2003 were set to expire, raising marginal tax rates across a wide swath of households, Maki said.

Still, with Obama\’s planned costly health care reforms, the deficit "will exceed one trillion dollars for many years to come," warned Peter Morici, a business professor at the University of Maryland.

"Unless US policymakers unite behind a credible plan to shrink the deficit by this time next year, US interest rates will begin to rise, and the economy will begin to suffer," warned Mark Zandi, chief economist of Moody\’s Analytics.

"This is the clear lesson of the Greek crisis," he said.

Obama has established a bipartisan debt commission charged with finding ways to reduce the gaping budget deficit, promising to halve the deficit he took on by the end of his term of office in 2013.

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The ratio of the US budget deficit to gross domestic product, the nation\’s economic output, is 10 percent and its debt-to-GDP is 65 percent.

For context, estimates of Greece\’s deficit-to-GDP ratio continue to climb and are near 14 percent while its debt-to-GDP ratio is closer to 125 percent.

"Yet Greece cannot be dismissed as too small or too far away to matter to the US. True, the US economy is much stronger and more competitive and will be able to grow at least partly out of its fiscal problems,\’ Zandi said.

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