Markets bounce back as US does a deal to beat risk of default
World stock markets rallied today as President Barack Obama agreed an 11th-hour deal to borrow £1.5 trillion to pay America's bills.
News of the deal two days before the credit deadline produced a sigh of relief from investors who had feared global gloom if the world's biggest economy had defaulted on its debts.
But the US President was forced into a major change to his economic approach in return for Republican agreement, agreeing to spending cuts to the same amount over 10 years.
The strict terms were a setback for Mr Obama, whose handling of the crisis has been criticised in some quarters, and a major victory for the fast-growing Tea Party movement that called the shots in the Republican party's negotiations.
Analysts said there was still a chance that the United States could have its prized triple-A credit rating downgraded for the first time. "There are still some very important votes to be taken by members of Congress," Mr Obama said at the White House after marathon talks.
"But 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."
In Tokyo, shares rose 1.7 per cent and the dollar rose briefly above 78 yen from 76.7 on Friday. "We welcome the US debt deal and hopefully this will stabilise markets," Japan's chief cabinet secretary Yukio Edano said.
Today's deal allows Mr Obama to carry on borrowing until 2013, long enough for him to clear the presidential elections before he has to go cap in hand for more borrowing.
It must be backed by votes in both houses of Congress later today and there remains a risk of a revolt in the Republican-controlled House of Representatives. Democratic leader Nancy Pelosi, a leading liberal, said some members of President Obama's own party would find the cuts hard to endorse.
Raising the debt ceiling means America can meet payments to international creditors while still paying everyday bills such as wages.
With the national debt standing at $14.3 trillion, Republicans refused to sanction an increase without a firm commitment to cuts. There will be $1 trillion in spending cuts over the next decade and a special congressional committee will identify another $1.5 trillion by December.
Republican House leader John Boehner said: "This isn't the greatest deal in the world. But it shows how much we've changed the terms of the debate in this town."
