We emphasize that the understandings between the Democrats and the Republicans prevented an immediate entry of the U.S. economy into recession and led to sharp increases in global stock markets immediately after the agreement announcement.
However, it is important to remember that there is still much work to be done in order to solve the U.S. fiscal problem, since the agreement reached reveals several of problems.
The first problem
Is that spending cuts were postponed.
Current agreement focuses mainly on taxes while tough government spending cuts decisions were postponed and U.S. leaders will need to discuss and solve the budget cuts in two months, since in early March lateral budget cuts of 110 billion Dollars will automatically take effect.
The second problem
Is that the “debt ceiling” was not raised. In a few weeks the U.S. government’s debts would reach the limit allowed by U.S. law, $16.4 trillion, and the government won’t have an option to continue raising money in the markets.
We should note that the debate regarding raising the “debt ceiling” is expected to be severe.
It is likely that the Republicans who “lost” the fight over the fiscal cliff exploit the “debt ceiling” issue to force further budget cuts on the Obama administration, especially in the medical insurance and social security programs.
On the other hand, President Obama stated that the budget cuts will not be negotiated with the Republicans and in order to solve the “debt ceiling” he requires a tax reform rather than cuts.
The debate regarding raising the “debt ceiling” will be the fifth debate in the past two years concerning U.S. fiscal issues.
In each of the latest discussions, policy makers reached a solution, though at the last minute.
Rating agencies reaction
After the agreement was reached, Moody’s declared that further steps must be taken in order to keep the U.S credit rating at its current level.
Moody’s noted that “Our ratings stance is to wait and see what the outcome of all of this is in the next few months, before we make any decision on the rating outlook or the rating itself. This is an important step, but it is the first step only”, and added that “a lack of further deficit reduction measures could affect the rating negatively”.
S&P noted that the deal reached does not affect the ‘negative’ credit rating outlook of the U.S., and policymakers have a lot of work on their hands.