a downgrade of America's gold-plated debt rating

Default avoided but fears on economy remain - Yahoo! News

 

The United States stepped back from the brink of default on Tuesday but congressional approval of a last-ditch deficit-cutting plan failed to dispel fears of a credit downgrade and future tax and spending feuds.

President Barack Obama and lawmakers from across the political divide expressed relief over the hard-won compromise to raise the country's borrowing authority after weeks of rancorous partisan battles.

Nevertheless, U.S. stocks tumbled, turning negative for the year, as investors shifted their attention to the increasingly grim state of the U.S. economy and the potential for a downgrade of America's gold-plated debt rating.

That risk grew when one of the three major ratings agencies said it was affirming the U.S. government's AAA-rated sovereign debt but slapping it with a negative outlook.

The announcement by Moody's Investors Service after U.S. markets closed could lead to a downgrade within 12 to 18 months. That could raise borrowing costs for U.S. companies and consumers as the economy risks slipping back into recession.

The Senate's approval by 74-26 votes of the $2.1 trillion deficit-reduction plan warded off the immediate specter of a catastrophic U.S. debt default. The bill passed the Republican-controlled House of Representatives on Monday.

Obama immediately signed it into law, lifting the $14.3 trillion debt ceiling with just hours to spare before the government was due to run out of money to pay all its bills.

The bitter feud between Democrats and Republicans has bruised Obama as he heads into a campaign to win a second term in 2012.

The $2.1 trillion deficit-reduction plan fell well short of a $4 trillion 'grand bargain' that was nearly agreed last month between the White House and congressional leaders.

Another ratings agency, Standard & Poor's has said $4 trillion in deficit-reduction measures would be needed as a "downpayment" to put America's finances in order.

S&P said in mid-July there was a 50-50 chance it would cut the U.S. rating in the next three months if lawmakers failed to craft a meaningful deficit-cutting plan. Investors are on tenterhooks about the chance of a downgrade by S&P.

The deal leaves political battles ahead over spending cuts and tax reform as the deficit-cutting plan is implemented. Obama and Democratic and Republican leaders said the agreement, while a welcome first step, was not enough on its own.

"We just kicked the can down the road ... the agreement doesn't really do anything about what got us into debt," Republican Senator Lindsey Graham told Reuters Insider.

"We had a good opportunity, we let it pass so we will keep struggling."

China, the largest creditor to the United States, urged Washington to act responsibly to deal with its debt issues, saying uncertainty in the U.S. Treasuries market will undermine the global monetary system and hamper global growth.

"We hope that the U.S. government and the Congress will take concrete and responsible policy measures ... to properly deal with its debt issues, so as to ensure smooth operation of the Treasury market and investor safety," central bank chief Zhou Xiaochuan said, in China's first official reaction to the last-minute passage of the U.S. debt deal.