Over the course of the weekend, leaders from the ruling Democratic party and the opposition Republicans came up with a compromise which will allow the US government to increase its borrowing ceiling and avoid running out of money. It was inevitable; any other form of action would be akin to an act of financial self-harm and would have resulted in the USA defaulting on part of its debt obligations. A US default would have sent an economic tsunami sweeping through the world’s financial markets. In its wake, the US credit rating would have been slashed and the role of the mighty Greenback as the world’s reserve currency would have been seriously undermined.
The new deal will increase the US debt ceiling (the amount that the nation can borrow) by a further $2.4 trillion and it involves a package of cuts which is designed to reduce the debt mountain by at least $2.1 trillion over ten years. It is unlikely that a debt-burdened Eurozone nation would be able to maintain a top credit rating with such a plan. In fairness to American politicians, it is likely that sovereign debt will loom large in next year’s election and all will be calling for reductions rather than a $0.3 trillion increase over the next ten years – which the current deal would permit. The deal avoids another series of negotiations on the debt ceiling on the run-up to the 2012 presidential election.
The increase in the debt ceiling must pass before the Democrat-controlled Senate before becoming law. Whilst the deal pleases nobody, it is likely to get approval and be signed by the President before the money formally runs out later today.