Done deal on a duff deal
The political leadership in Washington has produced a deal over the weekend on raising the debt ceiling. Leaders of both parties in both houses are backing the deal and this should allow it to pass later today when it's voted on in both houses. After the tragedy and farce of recent weeks, this news is understandably being met with some relief in markets, with the Swiss franc and yen softer, gold lower and stocks higher in Asia. Still, this is a deal fashioned on the floor of political theatre and seconds before the final curtain was due to fall. As such, it's not the best deal for the US by far and the issue of a US downgrade won't go off the agenda. The USD 2.5 trln of cuts is less than was being looked for by ratings agencies. Furthermore, the remaining cuts (to achieve USD 4 trln of savings originally targeted) are to come from a committee that is due to report later this year and if both houses can't agree on that, automatic cuts will come in, primarily on defence and Medicare. The past year has shown that Washington has always backed away from the tough choices on government borrowing and shunned higher taxes, so unless there is a change in approach on Capitol Hill, a debt downgrade is still on the cards. |