Debt deal agreed but may not save US AAA credit rating

Agreement criticised on both sides of the political divide, amid concern it may fail to be approved by Congress America has moved away from the brink of a catastrophic default after a deal was reached overnight to raise its debt ceiling. Stock markets around the world rallied on Monday, in relief that the world’s largest economy would probably avoid running out of cash this week. But the agreement, which includes around $2.5 trillion of spending cuts over the next decade, has been criticised by some on both sides of the political divide, and will probably not save America’s triple-A credit rating. There is also concern that the deal could still fail to be approved by Congress, which is due to vote on the package on Monday night. Some liberals are angry that the plan, which has been hailed as a triumph for the Tea Party movement, relies on spending reductions rather than tax rises to reduce the US budget deficit. The Democratic leader in the House, Nancy Pelosi, has already warned that some Democrats may be unwilling to support the deal. Under the plan, announced by Barack Obama late on Sunday, the US debt ceiling will be raised by about $2.4tn, in two stages. In return, the US government deficit will be reduced by a similar amount over the next decade. “This process has been messy and taken too long,” said Obama, who also admitted that the weeks of frustratingly slow negotiations in Washington had not delivered the deal he wanted . “This compromise does make a serious down-payment on the deficit reduction we need, and gives each party a strong incentive to get a balanced plan done before the end of the year,” Obama said. The Democratic leader in the Senate, Harry Reid, and his Republican counterpart, Mitch McConnell, both indicated they were optimistic that Congress will approve the deal. McConnell, who will meet with Republican senators on Monday, said: “We can assure the American people … that the United States of America will not for the first time in our history default on its obligations.” The full details of the plan have not been released. However, a fact sheet released by the White House showed that spending would be capped by $900bn over the next ten years. A bi-partisan committee will then be set up to agree a further $1.5tn of deficit reduction measures, which could include tax rises. If this committee cannot agree a deal, then an “enforcement mechanism” will trigger around $1.3tn of spending reductions beginning in 2013. Paul Krugman, the Nobel prizewinning US economist, accused Obama of surrendering to Republican opponents. “The deal itself, given the available information, is a disaster, and not just for President Obama and his party. It will damage an already depressed economy; it will probably make America’s long-term deficit problem worse, not better; and most important, by demonstrating that raw extortion works and carries no political cost, it will take America a long way down the road to banana republic status.” Markets rally, but AAA rating under threat Many economists believe that America could soon lose its triple-A credit rating, despite a deal being agreed. Standard & Poor’s, the rating agency, recently said that a credible fiscal plan would need to include $4tn of deficit reduction measures. “Avoiding the worst case scenario of a default on US Treasury obligations will not prevent a downgrade of the triple-A sovereign rating,” predicted Kevin Daly, emerging market debt portfolio manager at Aberdeen Asset Management. “So it’s time for us all to figure out just what it means when the US gets downgraded.” Stuart Gulliver, chief executive of HSBC, said the progress made over the US debt ceiling was “very welcome”, but also warned that America could see its credit rating cut. Wall Street is expected to open around 1% higher when trading begins on Monday. In London the FTSE 100 rallied by almost 1.5%, jumping 83 points to 5898, as traders welcomed the news that the US would probably not run out of cash. “Investors have breathed a collective sigh of relief that the risk of default has been avoided – albeit a few weeks ago nobody would have expected it to go down to the wire like this,” said David Jones, chief market strategist at IG Index. “It still has to be approved by Congress, so there is always the potential for a stumble here, but market reaction today seems confident that it will pass.” Most major commodities gained ground, pushing the cost of a barrel of Brent crude oil up by $2 to $119.40. Gold, which has benefited from the crisis as investors looked for safe havens, fell by 1%. Overnight, Asian stock markets rose strongly on the news. The Japanese Nikkei was up more than 2% at one stage, closing up 1.34% at 9,965 having broken through the 10,000 barrier earlier. United States Barack Obama US economy Republicans Democrats US politics Tea Party movement US economic growth and recession Ewen MacAskill Alex Hawkes guardian.co.uk

Posted by on August 1, 2011. Filed under News, Politics, World News. You can follow any responses to this entry through the RSS 2.0. You can skip to the end and leave a response. Pinging is currently not allowed.