Barack Obama warned debt deal will be disaster for party and presidency

Published on Tuesday 2 August 2011 17:25

US PRESIDENT Barack Obama sought to paint over the cracks in America's weakened economic status last night after signing-off a deal to ensure the US government could pay its debts.

The move came less than 12 hours before the country would have sunk into default.

On a day when the world's biggest economy was forced to confront the size of its debts, both Congress and the Senate agreed on a plan to allow the government to raise the country's debt ceiling - but only at the price of more than $2 trillion (1.2tn) in spending cuts.

Speaking in the Rose Garden of the White House after the plans were agreed, Mr Obama described the package as the first step to ensure that America could live within its means.

However, he sought to reassure his political base by declaring it would be the richest Americans and the big corporations who would be targeted first in order to pay down the country's debts.

"Everyone is going to have to chip in," he said.

While he won the backing of most of his party, some senior Democrats were warning that the package was a disaster for the party.

"This is a very dangerous moment. And people aren't going to blame Congress, they are going to blame the president of the United States," said Democrat Congressman Dennis Kucinich.

As Mr Obama spoke, one ratings agency, Fitch, announced that it would be retaining the United States' crucial Triple A credit rating.

However, there were warnings last night that, despite the deal, Washington had only bought itself a few months, with the US still facing the prospect of a humiliating downgrade.

The plan's proposed spending cuts amount to just half the sum that both Standard & Poor's and Moody's have said is required to maintain America's status.

Treasury secretary Timothy Geithner said he was not sure whether the deal would stave off such a humiliation.

"It's not my judgment to make," he said.Analysts estimate that a downgrade would add up to 0.7 percentage points to Treasury debt yields - the interest it pays on bonds - costing the country an extra $100 billion.

"A lot of people are very concerned about the potential for a downgrade," said Robert Pavlik, chief market strategist at Banyan Partners in New York.

Despite the deal, global stock markets fell yesterday amid poor retail figures from the US and fresh uncertainty in Europe, as market jitters recrossed the Atlantic and focused back on Spain and Italy's troubled economies.

The yield investors were paying for bonds in both countries leapt to its highest level since the euro came into being.

It prompted Spanish prime minister Jose Luis Zapatero to cancel a holiday, and forced Italian ministers to call urgent talks for today with central bankers.

The vote in Washington yesterday came barely ten hours before the US Treasury deadline of midnight 3 August was passed, when it warned that the country would have to begin defaulting on debt payments.

It will allow the US national debt - at present standing at $13.3tn - to increase by a further $2.4tn.

In return, there will be $917bn in spending cuts - while a cross-party committee will be set up to come up with a further $1.5tn of cuts to be brought in over the next ten years.

In a message yesterday evening, amid pressure from his own side on the price paid for the package, Mr Obama insisted that government spending had to continue despite the cutbacks his party had accepted as part of the debt deal.

"Deficit reduction is part of the agenda, but not all the agenda," he said.

He added the US "cannot balance the budget on the backs of the people who have borne the brunt of the recession".

However, he also acknowledged that the deal was just the first step that the country would have to take to bring its deficit back under control.