WRAPUP 5-Congress Averts U.S. Default, Downgrade Fears Haunt

Tuesday, 02 Aug 2011 12:49 PM

* Senate approves debt deal bill after House passage

* Markets wait for verdicts of ratings agencies

* Obama to sign deal into law, make statement

* Investor relief seen short-lived; more battles ahead

(Updates with Senate granting final approval to debt deal)

By Andy Sullivan and Donna Smith

WASHINGTON (Reuters) - Congress buried the specter of a U.S. debt default by finally passing a deficit-cutting package Tuesday, but the shadow lingered of a possible painful downgrade of the top-notch American credit rating.

Just hours before the Treasury's authority to borrow funds ran out, the Senate voted 74 to 26 to pass a hard-won compromise to lift the government's $14.3 trillion debt ceiling enough to last beyond the November 2012 elections.

President Barack Obama, who will seek a second term next year, was expected to immediately sign the deal into law, although without any White House ceremony.

His signature would draw the line under months of bitter partisan squabbling over debt and deficit strategy that had threatened chaos in global financial markets and dented America's stature as the world's economic superpower.

There was little suspense about the outcome of the vote in the Democratic-controlled Senate.

The bill overcame its biggest hurdle late Monday when the Republican-led House of Representatives passed the $2.1 trillion deficit-reduction plan despite some resistance from recalcitrant Tea Party conservatives and disappointed liberal Democrats.

Deep uncertainty remained, however, over whether the budget deal goes far enough in reining in deficits to satisfy major ratings agencies, which have threatened to downgrade the United States' AAA credit rating. Such a move would raise borrowing costs and act as another drag on the stumbling economy.

Ratings agency Standard and Poor's said in mid-July there was a 50-50 chance it would cut U.S. ratings in the next three months if lawmakers failed to craft a meaningful deficit-cutting plan.

S&P could downgrade U.S. ratings soon after the bill is signed by Obama, given that the agency will have all the information it needs to make a decision.

Treasury Secretary Timothy Geithner said he expected the ratings agencies to take a "careful look" at the situation but he was not sure whether the United States would be spared from a downgrade.

"I don't know. It's hard to tell," he told ABC News.

Initial relief in financial markets over an end to the gridlock quickly turned to concern Tuesday about risk of a U.S. ratings cut as well concerns based on recent economic data that growth could remain subdued. The major U.S. stock exchanges were all down about half a percent in early trading, and gold prices hit a new record high.

The plan calls for $2.1 trillion in spending cuts spread over 10 years and creates a congressional committee to recommend a deficit-reduction package by late November.

That appears to fall short of rating agency S&P's previous assertion that $4 trillion in deficit-reduction measures would be needed to avoid a downgrade by showing that Washington was putting the country's finances in order. (Additional reporting by Jeff Mason, Richard Cowan, Lauren LaCapra in Washington and Chris Sanders in New York; Writing by Matt Spetalnick and Pascal Fletcher; Editing by Jackie Frank)

© 2015 Thomson/Reuters. All rights reserved.

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