By: DailyForex.com
Markets around the world reacted positively to the news that US politicians had avoided their own version of mutually assured economic destruction in the small hours of New Year’s Day. In London, the FTSE 100 index rose to its highest level for 17 months, breaking through the 6000 point barrier to close at 6027. The Dow Jones industrial average rallied to close up by 2.4% higher, but trading today (so far) has been muted and some of the gains seen yesterday have already started to erode.
Whilst US lawmakers have managed to trash out a deal which will see that nobody on less than $400000 a year has to pay more taxes, the thorny subject of spending cuts was deferred for two months, so to that extent we are living on borrowed time. The Republicans control the US Congress and the ruling Democrats have a majority in the Senate and, as we have seen, both parties are having difficulties in finding common ground.
The ratings agencies have now entered the fray with Standard and Poor’s and Moody’s both urging the US to deal with its debt problems. The US debt ceiling (its current, maximum (self-regulated) borrowing limit is set at $16.4 trillion and the agreements put in place over the New Year mean that this figure is likely to be breached within the next couple of months. If bipartisan agreement on raising the limits or, better, concrete measures to start to contain the debt problem cannot be found by then, then the US runs the risk of not being able to service its debt obligations. This was the very problem that led the US to agree to the “Fiscal Cliff” in the first place in the summer of 2011. The ratings agencies have cautioned that unless the US takes credible steps to resolve its debt problems that its credit rating is at risk. If the US should see a significant downgrading of its credit rating, borrowing costs would rise, putting a further squeeze on finances.