Forex News – U.S. debt deal may still not avert ratings downgrade

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Finally after months of bitter wrangling, Republican and Democratic lawmakers reached a compromise late on Sunday night that will pave the way for a debt deal to be voted in the House of Representatives on Monday.

The budget plan aims to cut the deficit by $2.4 trillion over ten years and to raise the current debt ceiling in an effort to avert a U.S. default for the first time in history.

While immediate relief was felt across the markets soon after President Obama announced the news, the focus now shifts to whether the deal will be enough to convince credit rating agencies not to follow through with their threat of cutting the United States top notch triple-A credit rating.

Even after raising the debt ceiling, the credit agencies could still downgrade the U.S. based on credit agencies concerns of a viable long-term deficit reduction program. Risks exist in the implementation of various phases of this deal which involves a two-step process for reducing the U.S. deficit.

The Republicans had insisted on this multi-phase plan drafted by House Speaker John Boehner, and despite tough opposition from Democrats, a compromise was reached in order to end the deadlock in talks as the August 2nd deadline for default loomed.

The first phase calls for about $900 billion in spending cuts over the next decade and the next $1.5 trillion in savings must be found by a special congressional committee. Congress must act by Dec. 23, 2011, under the deal.

But Obama, like congressional leaders, noted that it was not the deal that he would have preferred but it was a compromise.

Ratings agencies have yet to comment on the news so far but speculation arises that they may not view this plan as going far enough to reduce the deficit.

“This looks like a short-term fix and we don’t have a long-term solution put in place, which is really what the rating agencies were looking for,” said Michael Woolfolk, senior currency strategist with BNY Mellon in New York.