Obama seals US austerity bill, but markets anxious

US President Barack Obama speaks to the press on August 2 © AFP/File Jewel Samad

AFP

WASHINGTON (AFP) – The US debt mountain undermined financial markets Wednesday, even after President Barack Obama signed an emergency austerity bill which averted a disastrous debt default.

Major rating agencies said they were keeping a watchful eye on the ability of the United States to cope with its debt, after Obama said Tuesday the contentious plan was “just the first step” on a long road to economic recovery.

But in a sign that the economic headaches were far from over for Washington, Chinese rating agency Dagong said it had downgraded the US credit rating after the debt ceiling for the world’s biggest economy was raised.

Global stocks fell under the twin pressures of lingering concern about the long-term health of the US economy, and a sharp resurgence of the debt crisis in the eurozone despite a package of emergency measures two weeks ago.

In Asia, Tokyo fell 2.11 percent, Sydney lost 2.27 percent and Seoul gave up 2.59 percent. In midday European trade, London’s benchmark FTSE 100 index shed 0.88 percent, Frankfurt lost 0.84 percent and Paris fell 0.43 percent.

The measure sent to Obama by deeply polarized lawmakers for his signature lifts cash-strapped Washington’s $14.3 trillion debt limit by up to $2.4 trillion while cutting at least $2.1 trillion in government spending over 10 years, a step forecast to drag down already sluggish US growth.

 “It’s an important first step to ensuring that, as a nation, we live within our means,” Obama said in the White House Rose Garden. “This is, however, just the first step.”

Obama spoke after the US Senate voted 74-26 to pass the measure — which cleared the House of Representatives by an overwhelming 269-161 margin on Monday — with just hours to spare before a midnight deadline that could have triggered a first-ever US default on its debt payments.

“Slowing down the big-government freight train from its current trajectory will give us the time we need to work toward a real solution,” said Republican Senate Minority Leader Mitch McConnell.

 Congressional approval paid immediate dividends as the IMF applauded the deal and the Fitch and Moody’s ratings agencies said the last-minute compromise would spare Washington from losing its sterling triple-A debt rating.

A downgrade would have likely led to a spike in US interest rates, hitting consumer and business spending. It would have severely damaged credibility in the US economy and sent shockwaves around global financial markets.

Moody’s, which had warned of a possible downgrade in July due to concern that the government could be forced to default, added a “negative outlook” on the grade, saying a historic downgrade could still come if fiscal discipline weakens or economic growth deteriorates significantly.

And Fitch said it would keep a close eye on the country’s long-term finances and pressed for “a credible multi-year deficit reduction plan” if Washington is to stay in the elite club of healthy, low-risk debtor economies.

Dagong meanwhile lashed out at its foreign rivals for not downgrading the US credit rating as it had done — from A+ to A with a negative outlook — and said the deal did not guarantee the “safety and interest” of creditors.

China’s state Xinhua news agency also warned the compromise had “failed to defuse Washington’s debt bomb for good,” and mocked the drawn-out negotiations between Republicans and Democrats as a “madcap farce of brinkmanship.”

China’s central bank welcomed the deal but said it would continue to diversify its foreign currency investments.

International Monetary Fund chief Christine Lagarde applauded the debt deal as “good for both the US and global economy” but pushed US leaders to craft a plan to put public finances “on a sustainable path.”

Obama’s 2012 reelection bid will turn on voters’ perception of his handling of the US economy, which has labored under historically high unemployment above nine percent as it struggles to recover from the global meltdown of 2008.

Republicans have promised the spending cuts will create jobs, but top Wall Street economists have warned the austerity measures will actually be a drag on sluggish US growth even as government stimulus measures run out.

The overall shift from priming the US economy to government belt-tightening is expected to reduce US growth next year by about 1.5 percentage points, according to JPMorgan Chase economists.

The vote came as the US Commerce Department reported that US consumer spending, the economy’s key driver, fell 0.2 percent in June relative to May, while personal income was basically stagnant, with just a 0.1 percent increase.

US stocks on Tuesday plunged more than two percent, focusing on dismal economic numbers and the prospect of no more government spending to boost the economy.

The new law calls for more than $900 billion in cuts over the next 10 years — $350 billion of it in defense — and creates a special congressional committee tasked with coming up with another $1.5 trillion in cuts to report by November 23, with Congress voting by December 23.

© AFP — Published at Activist Post with license