Politicians reach deal to end U.S. debt crisis
Jul 31, 2011, 9:34 p.m.
WASHINGTON (Reuters) - President Barack Obama said on Sunday that Democrat and Republican leaders had reached an agreement to reduce the U.S. deficit and avoid default, but it was not clear if the spending cuts were deep enough to stave off a credit rating downgrade.
The White House said the compromise would cut about $2.5 trillion from the deficit over the next 10 years but the reductions would not happen so quickly that they would drag on the fragile U.S. economy.
The deal would still have to be passed in the House and the Senate ahead of an Aug 2 deadline to avert a potential debt default.
U.S. S&P 500 stock futures bounced 1.5 percent and U.S. Treasuries futures slid on news of the deal. Gold and the yen fell.
Credit rating agencies had indicated earlier that deficit-cutting measures of around $4 trillion would be enough for the U.S. to avoid losing its prized AAA rating. Moody's said on Friday that it may keep the rating unchanged but with a negative outlook, meaning there was a risk of a downgrade in the medium-term.
MICHAEL WOOLFOLK, SENIOR CURRENCY STRATEGIST, BNY MELLON, NEW YORK
"This looks like a short-term fix and we don't have a long-term solution put in place, which is really what the rating agencies were looking for. The fact that the debt ceiling has been raised is independent of their action. If they do downgrade that would be a negative for the dollar. We could see the euro/dollar back up as far as $1.50.
"Come Monday morning U.S. equity markets should respond favorably to these developments but the dollar should come under some selling pressure. There is the negative correlation between the stock market and the dollar going back to the Lehman crisis and this reverts back to the carry trade when the Fed took interest rates back to zero.
"We'll get some more details as the week rolls on. For the time being the outside risk of a technical default is off the table and should provide some degree of comfort for the market."
MOHAMED EL-ERIAN, CO-CHIEF INVESTMENT OFFICER AT PIMCO, NEWPORT BEACH, CALIFORNIA
"Look for a relief rally as markets react favorably to the removal of the specter of a debt default by the most powerful economy in the world.
"For the rally to be durable, markets will need more than this downpayment agreement. They will look to a more coherent fiscal reform to emerge from the second step and, more generally, for additional measures to remove structural impediments to growth and jobs. Markets will also be asking whether this two-step agreement is sufficient to remove the threat of an S&P downgrade."
IRA JERSEY, INTEREST RATE STRATEGIST, CREDIT SUISSE, NEW YORK
"It's not dissimilar to the Boehner plan, I think it has a reasonably good chance of passing the House. It's a little light on cuts, so the risk of downgrade is still a little high. That's the next market moving headline you could see. Our thinking is it needs $3 trillion in cuts to avoid a downgrade by S&P so there is still a high probability of a downgrade, but this will avoid a fiscal shock.