The US debt mountain undermined financial markets Wednesday despite President Barack Obama signing a major austerity bill which raises the borrowing ceiling and averts default.
Credit rating agencies said they were still keeping a watchful eye on the ability of the United States to cope with its debt.
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.
Obama cautioned Tuesday that the contentious US 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 Wednesday it had downgraded the US credit rating after the debt ceiling for the world’s biggest economy was raised.
In a castigating review of US efforts, China’s official Xinhua news agency on Wednesday also warned the 11th hour deal had “failed to defuse Washington’s debt bomb for good,” while it mocked the drawn-out negotiations between Republicans and Democrats as a “madcap farce of brinkmanship.”
The measure sent to Obama by deeply polarized lawmakers 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 (0400 Wednesday) 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 shock waves 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.
The International Monetary Fund’s Managing Director 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 re-election 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 had also 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.