Monday, 1 August 2011

Agreement reached on US deficit-reduction plan

It looks like the US debt ceiling will be raised in time. From Bloomberg:

President Barack Obama said tonight that leaders of both parties in the U.S. House and Senate had approved an agreement to raise the nation’s debt ceiling by $2.1 trillion and cut the federal deficit by as much as $2.5 trillion over a decade, a deal that must now be sold to Congress.

“The leaders of both parties in both chambers have reached an agreement that will reduce the deficit and avoid default,” Obama said at the White House. “This compromise does make a serious down payment on the deficit-reduction we need. Most importantly it will allow us to avoid default.”

Congressional leaders reached a bipartisan agreement to raise the debt ceiling by at least $2.1 trillion, sufficient to serve the nation’s needs into 2013. They are preparing to sell to members the deal to cut $917 billion in spending over a decade, raising the debt limit initially by $900 billion, and to charge a special committee with finding another $1.5 trillion in deficit savings by the year’s end. They confront an Aug. 2 deadline for approval of the agreement.

Initial market reaction was positive.

The dollar and oil prices climbed, and gold fell. U.S. currency rose 1.3 percent to 77.79 yen and 0.2 percent to $1.4376 per euro at 9:44 a.m. in Tokyo. Gold slid 1.1 percent to $1,610.70 an ounce. Crude oil for September delivery rose 1.6 percent to $97.19 a barrel on the New York Mercantile Exchange.

The positive reaction may be short-lived, according to PIMCO's Mohamed A. El-Erian.

While the compromise shaping up will probably assuage immediate concerns about default in financial markets, “this relief will be short,” said Mohamed A. El-Erian, chief executive officer of Pacific Investment Management Co., the world’s largest manager of bond funds.

If Standard & Poor’s “sticks to what it said, it will downgrade” the U.S. debt following the deal, El-Erian said in an interview on ABC News “This Week.”...

The agreement “does nothing to restore household and corporate confidence, so unemployment will be higher than it would have been otherwise,” El-Erian said. “Growth will be lower than it would be otherwise. And inequality will be worse than it would be otherwise.”

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