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With tax deal, U.S. is off the cliff but not out of the woods

Traders were happy at work at the New York Stock Exchange Wednesday, as stocks surged — and storm clouds gathered.

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Traders were happy at work at the New York Stock Exchange Wednesday, as stocks surged — and storm clouds gathered.

WASHINGTON

A day after the nation edged away from a fiscal cliff that had threatened economic doom, the realization that other ominous fiscal battles loom tempered any sense of celebration Wednesday in the nation's capital.

The American Taxpayer Relief Act of 2012, passed late Tuesday, addressed just one of the three major issues that composed the cliff, the expiring Bush-era income tax cuts. The government faces more jarring fights in about two months, as it needs congressional approval to borrow more money and as automatic spending cuts — delayed this week to allow more time to find better alternatives — are scheduled to kick in.

Resolving the tax debate did buoy stock markets. The Dow Jones Industrial Average finished up 308.41 points to 13,412.55, while the S&P 500 closed up 36.23 points to 1,462.42. The tech-heavy Nasdaq ended up 92.75 points to 3,112.26.

Yet shortly after the markets closed, the rating agency Standard & Poor's warned that Washington didn't accomplish enough to remove the threat of further downgrades on the creditworthiness of U.S. government debt.

Similarly, Moody's Investors Service said Wednesday that the deal amounted to just a "further step" in clarifying the deficit and debt trajectory.

"It does not, however, provide a basis for a meaningful improvement in the government's debt ratios over the medium term," Moody's warned, making it clear that the United States remained on its negative watch list, where it has been since September.

If Moody's joins Standard & Poor's in downgrading U.S. bond ratings, borrowing costs for the already heavily indebted government might rise sharply. And if more than one rating agency takes away the AAA rating on U.S. debt, big pension funds and endowments that are required to hold only the safest of government bonds would have to shed their U.S. government bonds.

Simply put, there's a lot at stake as the White House and Congress try to resolve their impasse on debt and deficits.

The Treasury Department says the federal government hit its debt ceiling Monday, meaning that the agency is taking extraordinary measures to prevent default on payments already owed to creditors. Analysts suggest that those measures will run out somewhere between mid-February and mid-March, putting real urgency on coming talks to raise the debt ceiling before then.

And Tuesday's deal punted on the automatic spending cuts due to take effect this month, putting them off until March, the same month the federal government's spending authority expires.

The two unresolved matters amount to two major challenges on federal spending and borrowing that threaten the economic well-being of Americans.

"The deal this week to avert the fiscal cliff provides some clarity to individuals and business decision-makers; however, the relief may be temporary," John Silvia, the chief economist for Wells Fargo Securities in Charlotte, N.C., warned investors.

The looming battle over debt and deficits falls to the 113th Congress, which will convene at noon today with slightly more Democrats than the Congress that passed the deal this week to avert the cliff. While Democrats will control 55 of the Senate's 100 seats, Republicans will retain a sizable majority in the House of Representatives.

At the Capitol, partisan fury was as intense as ever on Wednesday.

"Let's hope Reid and President Obama resolve to be honest about the crisis our nation faces with the coming wave of entitlement obligations," said Rep. Ed Royce, R-Calif., referring to Senate Majority Leader Harry Reid, D-Nev., and to rising Medicare costs.

Hearing that, Rep. Sander Levin of Michigan, the top Democrat on the tax-writing House Ways and Means Committee, was annoyed.

"That is not true," he said of Royce's comment. "It was the Republican leadership in the House that walked away from a big package."

With tax deal, U.S. is off the cliff but not out of the woods 01/02/13 [Last modified: Wednesday, January 2, 2013 10:48pm]
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