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Factbox: Key political risks to watch in the United States

President Barack Obama and his Democrats are headed for conflict with the Republicans over the budget deficit and spending cuts, while Egypt has thrown up a complex challenge to U.S. policymakers.
/ Source: Reuters

President Barack Obama and his Democrats are headed for conflict with the Republicans over the budget deficit and spending cuts, while Egypt has thrown up a complex challenge to U.S. policymakers.

Here are the main political risks to watch in the United States:

BUDGET FIGHTS

The budget deficit this year is projected to jump nearly 40 percent over prior forecasts to hit a record $1.48 trillion. The two main political parties are at odds over how to cut spending to close the fiscal gap.

What to watch:

-- Congress has to raise the U.S. government's debt limit, currently at $14.3 trillion, or the United States will effectively default on its loans in April or May. Treasury Secretary Timothy Geithner has warned that doing so would cause "catastrophic" consequences for world financial markets and the U.S. economy. But the Democrats and Republicans are expected to work out a compromise and increase the debt limit, although this could mean Obama giving the Republicans heavy concessions on spending cuts.

-- Fights over cuts. Obama has offered a spending freeze worth $400 billion over 10 years, but Republicans in the U.S. House of Representatives pledged during congressional elections to slash $100 billion a year. Some Republicans want to see cuts extended to government-run entitlement programs like Medicare and Social Security, as well as tighter defense spending.

-- Despite the hefty debt burden, the U.S. Treasury is having no trouble finding buyers of government bonds and interest rates remain low. The concern is that buyers may one day lose faith in U.S. politicians' willingness to put finances back on a sustainable path. They might refuse to cheaply finance U.S. spending and borrowing costs would spike. In an unlikely doomsday scenario, the United States would have so much difficulty attracting debt investors that it would be forced into taking stern measures to curb spending and raise taxes. The IMF last week called on the United States to put in place a long-term plan urgently or risk losing market goodwill.

POLITICAL GRIDLOCK

Republicans took control of the House in January after sweeping gains in the November 2 elections, although Democrats continue to hold the Senate.

What to watch:

-- Gridlock has already begun and Democratic leaders in the U.S. Senate have effectively killed off an attempt by House Republicans to repeal Obama's 2010 healthcare reform. But dozens of states have challenged the reform in court. The legal challenges are more likely to be successful than congressional efforts.

-- Obama wants a corporate tax reform that would give companies a rate cut but also eliminate loopholes like allowing firms to defer tax from income earned abroad. Republicans are expected to fight hard to keep tax breaks. Multinationals like Pfizer, Hewlett Packard and Qualcomm, have successfully worked around the current system to keep their effective tax rates low.

EGYPT UPHEAVAL

The political crisis in Egypt hit the U.S. stock market on Friday, when the S&P 500 index recorded its worst one-day fall in about six months.

The way the United States handles the Egyptian turmoil will be key to whether Egyptian President Hosni Mubarak can hold on to office. Washington also would play a key role if he lost power, whether the transition were orderly or otherwise.

What to watch:

-- Signs of the Obama administration distancing itself further from Mubarak. Obama called for a "transition" in Egypt but fell short of abandoning the U.S. ally of 30 years.

-- Any change in Washington's support of the government in Saudi Arabia, which is the world's biggest oil producer. Brent crude futures surged above $100 a barrel on Monday on concerns about Egypt.

USA-CHINA RELATIONS

Disruption to U.S. relations with China can move bonds, currencies, stocks and commodities globally. Beijing is the biggest single holder of U.S. Treasuries, with around $900 billion. Some in Washington have feared that China could dump the bonds because of a political dispute, say over the status of Taiwan, bringing prices tumbling down. But that would be counterproductive to China and is seen as unlikely.

What to watch:

-- Any attempt to revive a bill in the Senate to punish Beijing for not revaluing the yuan is a big deal for foreign exchange and bonds. U.S. companies most likely to benefit from a stronger yuan include Caterpillar, Alcoa and General Electric but they also stand to lose from any tit-for-tat trade fight with Beijing. A yuan revaluation might stimulate Chinese demand for commodities but that could be offset by reduced export competitiveness.

-- Political and military crises in the Koreas and whether Washington and Beijing can work together to defuse tensions. Taiwan lingers as a potential flashpoint in China's relations with Washington, but trade ties between the island and Beijing have improved.

-- Friction between multinationals and the Chinese government after Google and Beijing locked horns over the Internet giant's search engine in 2010. That dispute is over, but companies like GE, Siemens and BASF have also complained of the tough investment climate in China.

PRESIDENTIAL ELECTION APPROACHES

Possible Republican rivals to Obama for the 2012 presidential election have already started to emerge.

What to watch:

-- Whether Obama will be able to maintain his more centrist approach as he seeks to court independent voters. His recent White House pro-business staff shakeup, tax deal with Republicans and a State of the Union speech that was seen as conciliatory suggest this is likely. He will probably steer clear of any big legislation, like the financial regulation reform or healthcare overhaul, that upset conservatives in 2010.

-- Possible Republican hopefuls include Mitt Romney, Mike Huckabee and Newt Gingrich, but all eyes are on Sarah Palin, the 2008 vice presidential candidate who has yet to say whether she will run. Building campaign warchests and frequent visits to the key elections states of Iowa and New Hampshire are early signs of a presidential run.