Fiscal Cliff Averted – Prepare for Another Crisis in 2 Months

In a late night session, the US Senate approved a deal to avert the fiscal cliff. When markets open after the New Year’s holiday, we could get some rises in stocks and and a weaker dollar. We’ve seen this process begin before the holiday.

However, this is far from a comprehensive long term solution. Here are 3 things to worry about.

The Senate voted 89 to 9 in favor of a deal that avoids tax hikes for individuals earning up to $400K a year and families earning up to $450K a year.

Obama was already quick to celebrate the fact that Republicans retreated from their original refusal to raise any taxes. But nothing is certain yet.

1. House approval: The deal needs to be approved by the House, where Republicans are in control. It’s hard to believe that Republicans in the House will reject or amend a deal made in the Senate, but anything is possible. It’s important to remember that a new House will begin working on Wednesday. The newly elected House has a smaller Republican majority. Could the outgoing House still change the course of the deal?
2. Temporary Delay in Sequester: The deal postpones the automatic spending cuts known as the “sequester” by only two months. Reaching a long term agreement on spending cuts, whether in entitlements (important to Democrats) or the military (important to Republicans) is still far.
3. No debt ceiling agreement: With all the commotion about the fiscal cliff, the debt ceiling issue is still open: the US has a debt of $16.4 trillion dollars. The current debt ceiling will be reached in February as well. Geithner already said that the Treasury is taking accounting measures to encounter the situation.

All in all, politicians did what politicians always do: reach a partial and temporary agreement. The situation now is better than it was before the deal was struck. However, a smaller crisis is still looming at the end of February.

It will be interesting to see if the new House, where Tea Party Republicans command a smaller majority, will work differently: if moderate Republicans and moderate Democrats will find a way to push forward compromises rather than stick to partisan lines.

Further reading: Trading the Fiscal Cliff: Different Currencies for Different Scenarios