Congress buried the spectre of a US debt default by finally passing a deficit-cutting package on Tuesday, Reuters reported.
President Barack Obama welcomed as “an important first step” the hard-won deficit-cutting compromise to lift the government’s $14.3 trillion debt ceiling after it was approved by the US Senate with a vote of 74 to 26
But, signalling possible tough political battles ahead over spending cuts and tax reform, Obama said the sacrifices required to reduce the US deficit needed to be fairly shared in US society, including by the wealthiet.
“Everyone is going to have to chip in, that’s only fair,” the president said in an address from the White House Rose Garden after the Senate approved the debt limit deal.
Final Congress approval came just hours before the treasury’s authority to borrow funds was to run out, according to Reuters.
Obama, who will seek a second term next year, signed the deficit-reduction measure into law later on Tuesday.
His signature draws a line under months of rancorous partisan squabbling over debt and deficit strategy that had threatened chaos in global financial markets and dented America’s stature as the world’s economic superpower.
There was little suspense about the outcome of the vote in the Democratic-controlled Senate.
The bill overcame its biggest hurdle late on Monday when the Republican-led House of Representatives passed the $2.1 trillion deficit-reduction plan despite some resistance from recalcitrant Tea Party conservatives and disappointed liberal Democrats.
Uncertainty remained, however, over whether the budget deal goes far enough in reining in deficits to satisfy major ratings agencies, which have threatened to downgrade the United States’ AAA credit rating. Such a move would raise borrowing costs and act as another drag on the stumbling economy.
Ratings agency Standard and Poor’s said in mid-July there was a 50-50 chance it would cut US ratings in the next three months if lawmakers failed to craft a meaningful deficit-cutting plan.
US default risk ‘extremely low’
Another agency, Fitch Ratings, said Tuesday that Congress’ last minute agreement to raise the US debt ceiling would allow the country to keep its triple-A rating, according to Agence France-Presse.
But Fitch warned that it would continue to review the country’s long-term deficit profile to see if it still merited being listed along with more healthy economies in the exclusive AAA club of sovereign borrowers.
Fitch called the agreement to raise the $14.3 trillion debt ceiling - allowing the treasury to borrow more and cover its mounting bills - “commensurate with its ‘AAA’ rating”, meaning that “the risk of sovereign default remains extremely low”.
The agreement showed that “despite the intensity and theatre of political discourse in the United States, there is the political will and capacity to ultimately do the right thing,” Fitch said.
However, it said it could continue to review the country’s grade this month.
“The review will focus on the US sovereign credit fundamentals relative to ‘AAA’ peers and medium-term economic and fiscal prospects” based on long-term deficit reduction plan that was a part of the debt ceiling hike package voted through Tuesday, according AFP.
Fitch said the country’s economic and financial foundation “remains strong” despite the grinding political battle over government spending and borrowing and near-stalled economic growth in the first half.
“The interest burden of federal debt is projected to remain moderate by historical standards and broadly in line with ‘AAA’ peers,” it said.
But Fitch warned that the country needs to spell out and implement “a credible multi-year deficit reduction plan”.
Based on current trends, US government debt at all levels will reach a large 100 per cent of gross domestic product by the end of 2012 and continue to rise.
It called that “a profile that is not consistent with the United States retaining its ‘AAA’ sovereign rating”.
Treasury Secretary Timothy Geithner said earlier he expected the ratings agencies to take a “careful look” at the situation but he was not sure whether the United States would be spared from a downgrade, Reuters reported.
“I don’t know. It’s hard to tell,” he told ABC News.
Initial relief in financial markets over an end to the gridlock quickly turned to concern on Tuesday about risk of a US ratings cut as well concerns based on recent economic data that growth could remain subdued.
US stocks dropped even as Congress approved the deal.
The plan, which lifts the debt ceiling enough to last beyond the November 2012 elections, calls for $2.1 trillion in spending cuts spread over 10 years and creates a congressional committee to recommend a deficit-reduction package by late November.
That appears to fall short of rating agency Standard and Poor’s previous assertion that $4 trillion in deficit-reduction measures would be needed to avoid a downgrade by showing that Washington was putting the country’s finances in order.