The United States stepped back from the brink of default on Tuesday but congressional approval of a last-gasp deficit-cutting plan failed to dispel fears of a credit downgrade and future feuds over taxes and spending. President Barack Obama and lawmakers from across the political divide expressed relief over the hard-won compromise to raise US borrowing authority.
Nevertheless, US stocks fell sharply as investors fretted over persistent economic and political uncertainties dogging the world''s largest economy. Senate approval on a 74 to 26 vote of the $2.1 trillion deficit-reduction plan, already passed on Monday by the Republican-controlled House of Representatives, drove away the immediate specter of a catastrophic US debt default.
President Barack Obama immediately signed the bill into law, lifting the government''s $14.3 trillion debt ceiling hours before a Tuesday midnight deadline. But the rancorous debt and deficit battle between his Democrats and their Republican rivals left Obama politically bruised as he heads into a campaign for a second term in 2012.
The agreement drew a line - for the moment - under months of bitter 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. International Monetary Fund chief Christine Lagarde said the deal reduced uncertainty in the markets.
But other worries loomed ominously for investors. Still present was the possibility of a painful downgrade of the top-notch American credit rating. And, questions lingered about the economy itself and whether the bipartisan deficit-cutting compromise could deliver the desired results.
"The bill''s passage ends some uncertainty, but now markets are focusing more on consumer spending, the weak GDP number, the overall economic feel, than on Washington," said Matthew Keator of the Keator Group, a wealth management firm in Lenox, Massachusetts. "The bill passing was a positive step, it brings some short-term certainty, but there are still long-term questions about the economic outlook," he added.
The bill 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 bipartisan committee in Congress to recommend a deficit-reduction package by late November. It does not include any tax increases. The budget deal did not resolve deep uncertainty over whether it goes far enough in reining in deficits to satisfy major ratings agencies, which could still downgrade the United States'' AAA credit rating. Such a move would raise borrowing costs and act as another drag on the stumbling economy.
BATTLES AHEAD Signaling tough political battles ahead over spending cuts and tax reform as the deficit-cutting plan is implemented, both Obama and leaders of both parties said their agreement, while a welcome first step, was not enough alone.
Obama, speaking after passage in the Democratic-led Senate, said the sacrifices required to reduce the US deficit needed to be fairly shared in US society, including by the wealthiest. "We cannot balance the budget on the back of the very people who have borne the brunt of the recession ... everyone is going to have to chip in, that''s only fair," the president said in an address from the White House Rose Garden.
He made clear he expected tax reform to emerge from deliberations by the new congressional committee, and that a "balanced approach" in which the wealthier pay more taxes was needed. Only moments after final passage, rival congressional leaders were handing out their political recipes for the way forward - Republicans in favour of spending cuts, and Democrats looking for tax reform or hikes. Senate Republican Leader Mitch McConnell called the bill a "first step," but urged further spending cuts.
RATINGS DOWNGRADE? Senate Democratic Leader Harry Reid said the next round of deficit reduction should include tax increases on the wealthy, as well as spending cuts. Republicans strongly opposed any tax increases during debt ceiling negotiations.
Market attention remained focused on the triple-A US credit rating. Ratings agency Standard and Poor''s said in mid-July there was a 50-50 chance it would cut the US rating in the next three months if lawmakers failed to craft a meaningful deficit-cutting plan.