Eleventh-hour rescue

Just in time,lawmakers in Washington passed a debt compromise,making the possibility that the US administration will default on its obligations vanishingly small. For those who depend on the stability of the international financial system and that is,in the end,everybody this should come as a considerable relief. Yes,the deficit cuts envisaged in the deal will likely not be sharp enough to ensure that all three major ratings agencies avoid downgrading their credit rating of US debt,which might shake the markets. But it is also possible that the markets have already taken the possibility into account. Indeed,even though the US Treasury looks beleaguered,investors seeking security are pouring money into Treasury bonds,not out.

Investors seek security because,deal or no,much remains uncertain about the future in Washington. In spite of the hot air and brinksmanship,both sides of the debt debate had at least one good point to make: sensible Republicans warned that the fiscal path the US was on was unsustainable,and worried Democrats pointed out that the weak US recovery should not be jeopardised by deep,immediate spending cuts. Unfortunately,it seems like neither side got their way in the eventual deal,which could save 2.5 trillion in spending,but opens up the possibility that the government will need to borrow several times that amount over the same period. Meanwhile,fiscal austerity of this magnitude might,according to the IMF,cost the US as much as a percentage point in growth a prospect that neither America nor the rest of the world can afford to view with equanimity.

Meanwhile,there is every possibility that a similar crisis will blow up again,as a crucial part of this deal involves postponing crucial decision-making to later in the political cycle partly to next year,and partly to 2013,when there will be a new Congress and,possibly,a new president. The European Union,too,has postponed restructuring national debt in the eurozone till 2013. Both are betting on growth to get them out of their crisis but the US deal has just made that a lot tougher.