Top of the Agenda: Obama and Congress Agree to Debt Deal from the CFR

Top of the Agenda: Obama and Congress Agree to Debt Deal

U.S. President Barack Obama and Republican and Democratic congressional leaders agreed on a plan to raise the United States' $14.3 trillion debt ceiling (WSJ) just ahead of a crucial August 2 deadline that could have seen the nation default on its debt obligations.

The deal, which will be voted on by the House and the Senate today, would raise the debt limit by $2.4 trillion in two stages, while committing to equal spending cuts over ten years. If approved, the deal will establish a new congressional committee to recommend a long-term deficit reduction (NYT) package by Thanksgiving.

Global investors responded positively to the news, boosting U.S. stocks (Reuters) and selling off safe-haven assets. But many investors still fear that the deal does not go far enough to shield the country from a credit rating downgrade that could see it lose its long-held AAA status. The agreement includes only around $1 trillion (Politico) in spending cuts upfront, far short of the $4 trillion encouraged by Standard and Poor's. While less severe than a default, a credit downgrade would have significant repercussions for the U.S. and global economies.

Analysis:

Regardless of the debate over the debt ceiling, many analysts expect a downgrade in the U.S. debt rating because of doubts about a comprehensive deficit-reduction plan. The fallout could include higher borrowing costs, a weaker dollar, and market turbulence, says this CFR Analysis Brief.

Raising the debt ceiling without a credible deficit-cutting agreement still poses real risks of imminent, damaging market turmoil, says this analysis by the Center for Geoeconomic Studies.

The debt deal would avert a catastrophic government default immediately and probably through the end of 2012. The rest of it is a nearly complete capitulation to the hostage-taking demands of Republican extremists, says this New York Times editorial.

The big picture is that the deal is a victory for the cause of smaller government, arguably the biggest since welfare reform in 1996, says this Wall Street Journal editorial.