US avoids default; retains AAA rating for now

August 3rd, 2011 - 10:52 am ICT by IANS  

Barack Obama Washington, Aug 3 (IANS) As the US avoided a disastrous default hours before the midnight deadline, two major ratings agencies reaffirmed the federal government’s AAA rating, but warned America wasn’t out of the woods yet.

Both Moody’s and Fitch kept their negative outlook on the US economy even as President Barack Obama Tuesday signed into law a last-minute compromise plan to raise America’s $14.3 trillion debt ceiling barely hours before it ran out of cash to pay the nation’s bills.

A “negative outlook” indicates the possibility that Moody’s would downgrade the country’s sovereign credit rating within a year or two.

As part of a bipartisan debt-ceiling deal signed into law Tuesday would have a super congressional committee determine $1.5 in deficit savings by Sep 5 Thanksgiving holiday. If Congress failed to support the proposals from the committee, automatic spending cuts would be triggered.

“While the combination of the congressional committee process and automatic triggers provides a mechanism to induce fiscal discipline, this framework is untested,” Moody’s said in a statement on retaining its negative outlook. “Attempts at fiscal rules in the past have not always stood the test of time.”

Credit agency Fitch took a similar position saying that there was “more to be done in order to keep the rating in the medium-term”.

The company also said the debt-ceiling agreement is “not the end of the process” and would like to see a plan to reduce the budget deficit “to a level that would secure the United States’ AAA status”.

Standard and Poor’s rating agency, which has suggested that deficit cuts below $4 trillion could squander the government’s top-notch rating, has yet to comment on the new deal.

Obama himself praised the deal as “an important first step for ensuring that as a nation we live within our means”.

But the American economy “didn’t need Washington to come along with a manufactured crisis”, he noted.

“It’s pretty likely that the uncertainty surrounding the raising of the debt ceiling-for both businesses and consumers-has been unsettling, and just one more impediment to the full recovery that we need. And it was something that we could have avoided entirely.”

(Arun Kumar can be contacted at arun.kumar@ians.in)

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