A deal has finally been reached to raise the US debt ceiling. But fears persist that credit ratings agencies could downgrade US Treasuries from their vaunted triple-A status.
John Boehner and Barack Obama.
President Barack Obama has announced that Democrats and Republicans have reached an agreement to raise the US debt ceiling and avoid a default. The deal, which, to the great anger of the US populace, has taken months of acrimonious, partisan negotiations to mete out, drags the US economy back from the brink of default disaster. The deal still needs to be voted on by Congress, with the voting due later today.
“We’re not done yet. I want to urge members of both parties to do the right thing and support this deal,” implored Obama.
The deal, which will cut $1 trillion of spending over ten years, alleviated concern of a US default and cheered the financial markets. However, observers concur that the bitter and long-drawn-out affair has inflicted reputational damage on both the US executive and legislature.
The plan involves a two-step process for reducing the US deficit. The first phase calls for about $900 billion in spending cuts over the next decade and the next $1.5 trillion in savings must be found by a special congressional committee. Under the deal, Congress must act by December 23 2011.
- Victory for the American right. Writing at Conservative Home, Tim Montgomerie considered the deal to be “a big victory for American Republicans. For small government. And, yes, for The Tea Party Movement.” Montgomerie insisted that “at every point Democrats drew lines in the sand only to retreat from them.” Montgomerie suggested that Obama’s tendency to “cave” has done him lasting reputational damage: “Obama is weaker today. Much weaker. His ratings are in decline. His base is very unhappy with him.” If the Republicans can choose a mainstream candidate for next year’s presidential election they can “win the White House,” concluded Montgomerie.
“There is nothing in this framework that violates our principles. It’s all spending cuts,” Republican House leader John Boehner told GOP members. His partisan summary of the deal can be read here (PDF).
- Obama ‘surrendered.’ At The New York Times, Paul Krugman was critical of Obama: “Republicans will surely be emboldened by the way Mr. Obama keeps folding in the face of their threats. He surrendered last December, extending all the Bush tax cuts; he surrendered in the spring when they threatened to shut down the government; and he has now surrendered on a grand scale to raw extortion over the debt ceiling.”
- Only mild relief for US economy. The deal offers only “mild relief” for the US economy which “has yet to show signs of any realistic pickup,” suggested David Lawder at Reuters, who said that the deal “does not decisively remove the threat that the nation’s AAA credit rating could be downgraded, an action that would raise borrowing costs across the board, and the prospect of further cuts ahead will cut short any celebrating.” Data released on Friday showed the U.S. economy grew just 0.4 percent in the first three months of this year and picked up unimpressively to 1.3 percent in the second quarter. Relief is likely to be “short-lived,” insisted Lawder who forecast that U.S. jobs data on Friday “will probably prove another reminder of the weak U.S. economy.” Unemployment is expected to remain at 9.2 percent, according to a Reuters poll.
- Markets respond. Jeremy Gaunt of Reuters noted that stocks were boosted by Obama’s deal announcement but reported that the uptick could be only temporary given there is a “widespread assumption” from analysts that credit ratings agencies could downgrade US Treasuries from their vaunted triple-A status, “a move that would impact the valuation of numerous other assets.”
- Credit rating reduction would be catastrophic. “Any reduction in America’s credit rating will affect every person on the planet,” hollered Sean O’Grady atThe Independent, who worried that the world is losing its “financial superhero.” “If the superhero is vanquished, there is no other power able to do that, except perhaps for China. Yet China has more of her wealth tied up in US Treasuries than anyone – $2 trillion-plus. Like two drunken giants trying to support each other, the world must fear being crushed if – or when –America and China trip and fall.”
“‘Deal’ just means the leaders agree – let’s wait to see what the votes look like in the morning,” cautioned Nico Hines of The Times.
- No done deal just yet. Andy Sullivan and Laura MacInnes of Reuters reported that the Democratic-led Senate is expected to pass the deal but warned that “it may face tougher opposition in the House of Representatives where both conservative Tea Party supporters and liberal lawmakers have expressed dissatisfaction with the agreement.” The news agency noted that “congressional insiders expect the deal to pass in both the House and Senate” but flagged up Tea Party Nation founder Judson Phillips angry reaction. He called the deal “a complete victory for liberals” and said the spending cuts were “a joke.”
“‘A sugar-coated Satan sandwich,” House Democrat Emanuel Cleaver on the debt deal. That’s how you nail the quote of the day,” tweeted Hines.