The long protracted bickering barely over, the US Congress passed into law a compromise bill to raise the debt ceiling by some $2.3 trillion dollars
on August 02, 2011 thus averting the possibility of an imponderable default by the most trusted repository of global sovereign holdings – US Treasury debt. For those who followed the squabbling between Republicans and Democrats in the US Congress must be well aware that the Budget Control Act of 2011 was a compromise deal that neither side liked. It was hardly the bipartisan pursuit of rapprochement that characterized many compromises worked out in Congress throughout history. This time it was all too apparent that neither side got what they wanted. It felt like the parting of ways rather than a meeting of minds. What is now clear, the markets as well as the rating agencies did not like what they saw.
Hypothetically, if the debt ceiling were not raised by August 02, the US government would have had to cut spending immediately by 40% which would mean defaulting on many of its obligations, including debt. For one, that would have been the most vexing development for the Chinese – holders of the largest amount of US Treasury Bills, to the tune of some $1.5 trillion. For another, that would have led to the downgrade of US debt, creating a firestorm in financial markets across the globe. In the end, the two groups in Congress thought it better than to let the US economy fall off the precipice.
But perhaps the damage was already done. The way the two sides kept tossing their dogmatic positions at each other until the final hour would make the Awami League (AL)-Bangladesh Nationalist Party (BNP) confrontation in Dhaka look like a friendly football match. Republican members of Congress (House and Senate) found themselves boxed in on their inflexible stand for spending cuts and no tax (revenue) increases which left little room for compromise with their Democratic colleagues – led by President Obama -- who argued for a balanced approach to debt and deficit reduction comprising a combination of spending cuts and revenue increases. As subsequent polls and market developments show, neither side won, but the nation lost.
What was merely a threat did come to pass as S&P, one of the three leading global ratings agencies, went ahead with the downgrade of long-term US debt as of August 05, 2011. S&P reduced the triple-A rating held by US debt to AA+ -- the first such downgrade of US Treasury debt since 1917--, pointing fingers at the budget deal recently brokered in Washington which they said didn't do enough to address the gloomy outlook for America's finances.