U.S. avoids default but fails to dispel economy fears

Tue Aug 2, 2011 6:31pm EDT
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By Andy Sullivan and Jeff Mason

WASHINGTON (Reuters) - The United States stepped back from the brink of default on Tuesday but congressional approval of a last-gasp deficit-cutting plan failed to dispel fears of a credit downgrade and future tax and spending feuds.

President Barack Obama and lawmakers from across the political divide expressed relief over the hard-won compromise to raise U.S. borrowing authority. Nevertheless, U.S. stocks fell sharply as investors fretted over persistent economic and political uncertainties dogging the world's largest economy.

The possibility of an eventual downgrade of the top-notch American credit rating grew when Moody's Investors Service, one of the three major ratings agencies, said it was slapping a negative outlook on America's AAA-rated sovereign debt.

The move, announced after U.S. markets closed, could lead to a downgrade within 12 to 18 months that would probably raise borrowing costs and further hurt the struggling U.S. economy.

Moody's, affirming the AAA rating, said the deal signed by Obama was a first step toward fixing the budget problems but that the United States was at risk of a downgrade if there was a weakening of fiscal discipline in the coming year, if no further measures were taken in 2013 or if the economy deteriorated.

Another agency, Fitch Ratings, did not rule out slapping a negative outlook on the U.S. AAA rating when it concludes a review of the country later this month, the agency's top analyst for the United States told Reuters on Tuesday.

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

The $2.1 trillion deficit-reduction plan approved by Congress falls short of S&P's previous assertion that $4 trillion in deficit-reduction measures would be needed to show that Washington was putting the country's finances in order.   Continued...