Debt crisis - still plenty more to settle

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Debt crisis - still plenty more to settle

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The United States may have avoided defaulting on its debts with a political agreement to increase the amount of money it can borrow, along with promises to spend less, but the financial markets remain sceptical even as the politicians continued to bicker about tax hikes and spending cuts.

Washington already owes 14.3 trillion dollars. By raising the debt ceiling it can sell government bonds worth another 2.1 trillion dollars to pay its bills.

To reach the agreement President Barack Obama had to accept deeper spending cuts than he wanted, though he did manage to prevent cuts to areas like medical programmes for the poor and elderly – for the moment.

Obama also said “job creating” investment in education and research would be preserved.

The big problem is that so far there is only agreement on $917 billion worth of savings over the next 10 years: another $1.5 trillion dollars worth will have to be agreed by a Congressional commission in November and passed by the end of the year.

The financial experts at the ratings agencies have been going through the details of the deal and the fear is that they will decide it does not add up so they will downgrade Washington’s AAA status.

The debt deal also does nothing to boost the fragile US economy, which nearly stalled in the first half of this year and shows no sign of picking up.

Having managed reasonably respectable growth of 3.1 percent in the third quarter of 2010 and 2.6 in the fourth quarter, the US economy came close to stalling between January and March expanding by just 0.4 percent followed by growth of just 1.3 percent in the second quarter of 2011.

And for the moment there is no talk in Washington of new stimulus measures to change that situation, leading to fears the US could slip back into recession.