Debt Deal Doubts Lower Wall St

on August 01 2011 10:29 AM

 

Doubts on the Obama Debt deal have hit stocks and the USD shortly after open today.

Sunday's deal would raise the debt ceiling by up to $2.4tn from the current $14.3tn and would cut the US budget deficit by a similar amount.

A bipartisan commission will also be set up to seek further reforms.

The deal needs to pass both houses of Congress to become law, but elements of both parties are expected to oppose it.

Republican and Democratic leaders in the House of Representatives and the Senate are to spend Monday meeting their own party members and attempting to convince them of the merits of the bipartisan deal.

The markets responded to the breakthrough with relief. The Dow Jones index in New York gained nearly 1% soon after opening, following gains in Tokyo and London.

The US Congress is preparing to vote on a deal struck between the White House and party leaders that would end weeks of uncertainty and avoid a default.

In the Senate, where a vote is expected around 14:00 local time (18:00 GMT), analysts say there is more of consensus.

Democratic Majority Leader Harry Reid and Republican Senate leader Mitch McConnell were two of those pushing the plan and they are thought likely to be able to corral their troops to approve the deal.

In the House, Democratic leader Nancy Pelosi is expected to ensure enough Democrats vote for the bill to help smooth its passage, analysts say.

Announcing the deal on Sunday night, President Obama himself conceded that the deal was not the one he would have preferred, but noted that the compromise plan would make a "serious downpayment" on the US deficit.

"I want to announce that the leaders of both parties in both chambers have reached an agreement that will reduce the deficit and avoid default, a default that would have had a devastating effect on our economy," Mr Obama said.

* The deal would allow President Barack Obama to raise the debt ceiling in three steps. Congress would get a chance to register its disapproval on two of these, but would not be able to block them unless it musters a two-thirds vote in both the House and the Senate - an unlikely prospect.

* It envisions spending cuts of roughly $2.4 trillion over 10 years, which Congress would approve in two steps - an initial $917 billion when the deal passes Congress and another $1.5 trillion by the end of the year.

* The first group of spending cuts would apply to the discretionary programs that Congress approves annually, covering everything from the military to food inspection.

* Those programs would be capped each year for 10 years. The caps would be relatively modest at first to avoid stifling the shaky economy - spending for the fiscal year that begins October 1 would be only $6 billion below the current level of $1.049 trillion. The caps would have a greater impact in later years, when it is hoped that the economy will have recovered.

* Some $350 billion of the $917 billion total would come from defense and other security programs which now account for more than half of all discretionary spending. Republicans are resisting this idea and it is one of the few areas of dispute left.

* Automatic across-the-board spending cuts would kick in if Congress does not observe the caps in coming years.

* A 12-member congressional committee, made up equally of Republicans and Democrats from each chamber, would be tasked with finding a further $1.5 trillion in budget savings.

* That committee could find savings from an overhaul of the tax code and restructuring benefit programs like Medicare - the politically risky decisions that lawmakers have not been able to agree on so far.

* The committee would have to complete its work by November 23. Congress would have an up-or-down vote, with no modifications, on the committee's recommendations by December 23.

* If the committee cannot agree on at least $1.2 trillion in savings, or Congress rejects its findings, automatic spending cuts totaling that amount would kick in starting in 2013.

* Those cuts would fall equally on domestic and military programs. Medicare would face automatic cuts as well, but Social Security, Medicaid, federal employee pay, and benefits for veterans and the poor would be exempt.

* The plan also calls for both the House and the Senate to vote on a balanced budget amendment to the Constitution by the end of the year. It is not likely to receive the two-thirds vote in each chamber needed for passage, but its inclusion will make it easier for conservatives to back the overall deal.

Shayne Heffernan

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