US Debt Plan: Rating Agencies Disappointed

ForexNewsNow | Published on August 3, 2011 at 3:54 am

After a weekend of intense negotiations, Republicans and Democrats finally reached an agreement on a fiscal consolidation plan that would entail approximately $2.4 trillion in budgetary savings over 10 years.

The plan, rather similar to US Speaker of the House John Boehner’s revised plan, is halfway between an emergency solution and a broader agreement that would have included tax increases, as President Obama had originally desired.

The agreement includes two major steps: a debt limit increase of $900 million with corresponding spending cuts and the establishment of a bipartisan committee that would be tasked with finding $1.5 trillion in additional savings before the end of 2011. The main novelty lies in the establishment of a “safety net” that provides budget cuts of $1.2 trillion over 10 years if the bipartisan committee fails to reach an agreement.

However, this plan only partially solves the problem of debt sustainability and sensitive budgetary issues which have yet to be addressed including tax reform, cuts in social program budgets, etc. In addition, the $2.4 trillion debt is still well below what rating agencies had wanted and they have not ruled out a possible downgrade of the US credit rating in the coming months.

The plan may nevertheless satisfy Moody’s, whose chief economist, Mark Zandi, announced that an agreement like this would be enough to maintain the current rating.

In conclusion, the debt plan compromise between President Obama and congressional leaders provided relief in the face of the risk of a default and the impending firestorm it would have caused to the global financial markets. However, the plan is not ambitious enough ($2.4 trillion in budget cuts against $4 trillion expected by the rating agencies) and only delays certain unavoidable debates that are sure to follow in its footsteps.

 

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