I was in Kuala Lumpur last week to speak in the International Rubber Conference 2011. Part of my message centred on how the US would increase its debt ceiling before the dreaded deadline of August 2.

The whole of last week had the world riveted on the U.S. because it seemed that U.S. policymakers were caught in a deadlock, with no credible plan in sight. This was primarily because the Republicans had insisted on deep spending cuts before they would consider raising the USD14.3 trillion limit on U.S. borrowing.

Yesterday however, the markets heaved a sigh of relief when the US finally revealed that an agreement had been reached. “The leaders of both parties in both chambers have reached an agreement that will reduce the deficit and avoid default,” President Obama said at the White House.

In terms of avoiding default, the plan is to raise the debt ceiling by at least USD2.1 trillion. This would be sufficient to serve the nations needs into 2013.

In terms of reducing the deficit, the plan has a two-step process.

Firstly, it involves about USD900 billion in spending cuts over the next decade. Secondly, it involves USD1.5 trillion in savings, which must be found by a special congressional committee. Congress must act by December 23, 2011, under the deal.

If the special committee fails to yield at least USD1.2 trillion in debt reduction, sweeping automatic spending cuts would go into effect. These would include cuts in defense programs and Medicare.

While this plan does seem like good news for the U.S. at least for now, the bad news is that Standard & Poor’s, one of the world’s leading rating agencies, could still downgrade the current AAA rating of U.S. debt.

The S&P, which has given the U.S. a top AAA ranking since 1941, had mentioned last month that a 

reduction could occur as soon as August if there wasn’t a “credible” plan to reduce the nation’s deficit. A credit downgrade would undermine confidence in U.S. solvency and send negative ripples throughout the international financial system.

The two other ratings agencies, Moody’s and Fitch, have affirmed their AAA credit ratings for the U.S. while warning that the ratings could be downgraded if lawmakers fail to enact debt reduction measures and the economy weakens.

Last night, President Barack Obama signed the historic deficit-reduction package into law. Obama acted just hours after the Senate passed the bill on a bipartisan 74-26 vote.

The Senate action followed the Monday vote in the House of Representatives, when a bipartisan majority also approved the deal. In the House, 174 House Republicans and 95 Democrats voted for the measure, and 66 Republicans and 95 Democrats voted against it.

Traders worldwide have signaled their thoughts on the debt-limit increase by sending the USD/CHF to 0.7607, the lowest level recorded in history.