Anne Penketh: No disaster, but long term everyone loses
President Barack Obama speaks from the White House briefing room in Washington. Photo / AP
A slow-motion train wreck known as the raising of the United States debt ceiling has been averted at the 11th hour.
Senate leaders, followed by a sombre President Barack Obama who spoke from the White House, announced that the US would not default on its obligations after Democrats and Republicans reached a deficit-cutting compromise.
But despite the backroom deal between Congressional leaders and the White House aimed at averting default before tomorrow's deadline, there is no cause for celebration.
However Republicans and Democrats try to spin the result, there will be only losers from the last two weeks of bad-tempered negotiations, starting with the American people and ending with the President himself.
The latest poll results over the weekend provided the clearest picture yet of the weakening of Obama. His approval ratings have dropped by five points to 40 per cent, amid accusations he has failed to show leadership.
The reputation of Congress, already tarnished in the public mind, is in tatters at 18 per cent approval after its members hurled insults of "Taleban" and "hobbits" at each other.
Seriously undermined is Republican John Boehner, the House of Representatives Speaker widely seen as a hostage of the Tea Party whose members demanded a budget reduction package in return for raising the debt ceiling above US$14.3 trillion ($16.2 trillion).
"We're not done yet," said Obama, as he described the outlines of the package which must still be approved by both chambers of Congress (Senate and House).
The compromise will rankle with Democrats who have criticised the President for withdrawing support for tax increases on high earners, and with Republicans who will bridle at proposed defence spending cuts.
The two-part plan would cut nearly US$1 trillion over 10 years, and also set up a bipartisan committee to look at further cuts by this November, at which point "everything will be on the table", Obama said.
But the total savings will still not amount to US$4.4 trillion, the amount the credit ratings agencies say is necessary to avoid a downgrade of the country's AAA rating. And it remains to be seen whether the country can avoid a return to economic uncertainty, despite Obama's pledge that there won't be "the same crisis next year", when he is seeking re-election.
The raising of the debt ceiling (which has happened 74 times since 1962) should have been a technicality, but was linked by the Tea Party newbies in Congress to their demands for far-reaching reform, including a constitutional amendment to balance the budget.
Obama and the Democrats insisted on a deal that would go beyond 2012. Amid the continuing stalemate, Congressional Democrats repeatedly pointed out that the reason for the Republicans' reluctance to compromise was to deny Obama a second term.
But the Democrats, like the Republicans, were divided among themselves, particularly on the issue of tax increases and the President's willingness to put social entitlement programmes into the mix.
Even if this package is adopted, the longer-term consequences are unknown. It could be that the spending cuts successfully demanded by the Tea Party could cast a deeper chill over the economy, which is struggling to rebound. Unemployment remains stubbornly at 9.2 per cent. Wall Street ended its worst week in a year as the stalemate dragged on.
Even without defaulting on the debt, the long-term debt and deficit problem remains, as Moody's credit rating agency warned. "Reductions of the magnitude now being proposed, if adopted, would likely lead Moody's to adopt a negative outlook on the AAA rating," the agency said as rival Republican and Democratic packages were being discussed.
"The chances of a significant improvement in the long-term credit profile of the government coming from deficit reductions of the magnitude proposed in either plan are not high."
The American people, whose interests have been invoked at every turn, are disgusted. On Saturday, after Obama urged them on TV to make their views known by tweeting and calling their Congressmen, the phone lines on Capitol Hill reached capacity.
And so this Greek tragedy staggers to its conclusion. The dead bodies are offstage, but they will haunt the rest of Obama's first term.
By Anne Penketh