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Markets Surge, New Crisis Looms after Partial 'Fiscal Cliff' Deal

Traders work on the floor at the New York Stock Exchange in New York, January 2, 2013.
World markets greeted 2013 on a high note Wednesday after the U.S. Congress and President Barack Obama reached a last-minute deal to avert a financial crisis that analysts say could have sent the United States into a recession. But experts say a potential crisis in the world’s largest economy has yet to be resolved.

Late Tuesday, the U.S. House of Representatives approved a partial deal to avert more than $500 billion in spending cuts and tax increases. In the United States, key stock markets soared, with the Dow Jones Industrial Average ending the day two percent higher, the Standard &Poor's 500 climbing 2.5 percent and the Nasdaq Composite Index advancing three percent. Stocks also surged in Europe and Asia.

But analysts caution that investor optimism will be short-lived, as the so-called “fiscal cliff” agreement between President Obama and Congress delays for two months decisions about large federal spending cuts.

Jeff Sica of Sica Wealth Management says that although the legislation avoided what he called the “worst possible” outcome, he expects that new, higher taxes will reduce hiring by small businesses and decrease the nation's gross domestic product.

“I see that the slowdown is going to continue, and that most of all, the slowdown is going to involve confidence. And primarily because we have so many open-ended issues to deal with -- taxes and the debt ceiling -- there’s going to be a level of uncertainty that’s going to thwart a lot of the potential future growth economy,” Sica said.

Sica predicts that fresh debate about raising the U.S. debt ceiling will begin within days, and that compromise on that issue will be far harder to reach.

“I don’t anticipate that the solution is going to be what the solution was last time, which was to raise the debt ceiling. I anticipate that this time around it’s going to involve some degree of spending cuts, because even the president himself agrees that the deficit is too high,” Sica said.

The United States reached its borrowing limit on Monday, at $16.4 trillion. Officials say the country will be able to pay its bills for another two months, but by then will need to increase the debt ceiling -- an action likely to spark another extended debate over Washington's spending priorities. Experts say the issue will be addressed in February, when President Obama presents his budget for the 2014 fiscal year that begins on October 1.