Obama strikes debt deal

World has been anxiously waiting for agreement as deadline looms

WASHINGTON - Republicans and Democrats in Congress reached agreement with US President Barack Obama to raise the limit on US borrowing and forestall an unprecedented American default, marking the start in the final chapter of one of the nastiest and divisive episodes in recent American political history.

"I want to announce that the leaders of both parties in both chambers have reached an agreement that will reduce the deficit and avoid default, a default that would have had a devastating effect on our economy," Obama said in hastily announced remarks at the White House.

The agreement meets one of his key demands, raising borrowing power sufficiently to keep the partisan poison pill from returning to the national agenda until after the 2012 election. It does not include any tax increases that Obama had pressed hard for to include.

House Speaker John Boehner, in a conference call with Republican members of the lower chamber, said the deal was a good one that met the demands of all Republicans.

Bowing to the still unknown outcome of congressional action, Obama said important votes remained to be taken but that leaders of both parties in both houses of Congress agreed to a plan that would initially cut about $1 trillion from US spending, "the lowest level of domestic spending since Dwight Eisenhower was president" in the 1950s.

"It provides a relief to the world," said Li Jinlin, dean of the School of Management and Economics at Beijing Institute of Technology. "By any standard it is good news, since the world's largest economy avoids default on a technical point of view."

Markets around the world are expected to rebound after the news, he added.

However, some Chinese experts said China should diversify its massive investment in the US dollar.

"Although a default seems to be avoided, China's dollar-denominated assets will still face unpredictable risk amid the weakening US dollar," said Lai Pingyao, a professor of economics at the University of International Business and Economics in Beijing.

"If the US debt crisis teaches China a lesson, it is a lesson to not rely too much on a single currency," he said.

Lai also said the US debt impasse may prompt China to quicken its pace of internationalizing its own currency, the yuan.

No votes were expected in either house of Congress until Monday at the earliest, to give rank and file lawmakers to review the package. Tuesday is the deadline to avoid a US default on payments to investors in Treasury bonds, recipients of Social Security pension checks, those relying on military veterans benefits and businesses that do work for the government.

Obama and many economists and financial experts predicted global chaos and plunging stock markets had no deal been reached by midnight Tuesday.

Qian Liwei, a researcher at the Institutes of American Studies with the China Institute of Contemporary International Relations, said any agreement would be a relief to China, but vigilance is important since the debt wrangling could happen again.

"The essence of this problem is a political struggle between parties in the US, but the whole world was dragged to the edge of a global crisis by their playing with fire," Qian said. He pointed out that the US should avoid any repeat of this kind of crisis.

"The rate of US Treasury securities is a benchmark for global investment rates. If it fluctuates it will not only trigger a chain reaction but also damage the credibility of the US," he said.

If approved on Monday, the compromise would presumably preserve America's sterling credit rating, reassure investors in financial markets across the globe and possibly reverse the losses that spread across Wall Street in recent days as the threat of a default grew.

But Stanford University economics professor Michael Boskin, who was chairman of President George H.W. Bush's Council of Economic Advisers between 1989-1993, is disappointed that legislators are only focused on the now, and not looking at the bottom line.

"The debt dilemmas in Europe and the US prove yet again that elected officials will ignore long-run costs to achieve short-run benefits, and will act only when forced, in a doomed effort to circumvent the laws of economics and revoke the laws of arithmetic," Boskin's wrote in an article released by Project Syndicate on Friday.

He said the economic disruptions will likely last well beyond the summer, bringing years of economic consequences.

The broadest outlines of the emerging plan, a deal that involved difficult negotiations between Senate Republican minority leader Mitchell McConnell and Vice-President Joe Biden, would raise the federal debt limit in two stages by at least $2.2 trillion, enough to tide the Treasury over until after the 2012 elections.

Big cuts in government spending would be phased in over a decade. Thousands of programs - the Park Service, Internal Revenue Service and Labor Department accounts among them - could be trimmed to levels last seen years ago.

China Daily reporter Wei Tian and Agence France-Presse contributed to the story.

Associated Press

(China Daily 08/01/2011 page1)