Obama warns against 'reckless' default

2011-07-26 10:00

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Washington - President Barack Obama on Monday called on divided congressional leaders to compromise and break a deadlock over raising the US debt limit that he said risked a "reckless" national default.

Obama made the appeal in an address to the nation as Democratic and Republican leaders remained at loggerheads over divergent debt plans that have highlighted the ideological gulf between them. Even if default is avoided, as most expect, the impasse has raised fears of an unprecedented downgrade of America's gold-plated credit rating.

As the clock ticks toward an August 2 deadline to act on raising overall borrowing authority so the nation can pay its bills, the stalemate is rattling investors worldwide, sending stocks and the dollar down and pushing gold to a record high.

But market reaction so far has fallen short of the panicky sell-off some politicians had feared after weekend talks broke down.

In his address, Obama spelled out the severe economic consequences of a default or a credit ratings downgrade resulting from failure to strike a deal to raise the $14.3 trillion debt limit and reduce the budget deficit.

"Defaulting on our obligations is a reckless and irresponsible outcome to this debate. ... We would risk sparking a deep economic crisis - one caused almost entirely by Washington," Obama said.

Ordinary Americans

He urged a compromise to reduce the deficit by $4 trillion and share the burden of cuts evenly across society.

The acrimonious partisan debate is heating up the US political climate well ahead of November 2012 elections in which Obama will seek re-election.

Obama warned that a first default in US history would directly affect the lives of ordinary Americans, because the government would not be able to pay bills that include monthly Social Security checks, veterans' benefits, and government contracts with thousands of businesses.

"I have told leaders of both parties that they must come up with a fair compromise in the next few days that can pass both houses of Congress - a compromise I can sign," he said.

"And I am confident we can reach this compromise".

Obama chastised some Republicans for insisting on a "cuts-only" approach and opposing White House calls for a "balanced" deal that would also include the country's wealthiest companies and individuals giving up tax breaks.

Blank check

"The American people may have voted for divided government, but they didn't vote for a dysfunctional government," he said.

In his response to Obama, the top Republican in Congress, House Speaker John Boehner, reiterated his party's objection to the plan proposed by the president, saying his so-called "balanced" approach meant: "We spend more ... you pay more."

"The sad truth is that the president wanted a blank check six months ago and he wants a blank check today. That is just not going to happen," Boehner said.

Analysts said Obama's speech appeared more aimed at voters than at reassuring markets.

"In that respect, it doesn't necessarily instil confidence that they are any closer to reaching a deal than they have been," said Omer Esiner, chief market analyst at Commonwealth Foreign Exchange in Washington.

"The market is still in wait-and-see mode. But every day that goes by without a deal will see investors become a bit more defensive," Esiner said.

Global markets at risk

But fears of the consequences of a continuing failure by Congress to thrash out an agreement were rising.

While administration officials have called a US government default "unthinkable", the showdown risks badly denting the image in global markets of the world's largest economy, and threatening its recovery from recession.

"I think it's incredibly damaging. I think the rest of the world looks at the United States and is just shaking their heads," said Michael Yoshikami, chief executive and founder of Walnut Creek, California-based YCMNET Advisors, which has $1.1bn in funds under management.

Republicans in the House of Representatives unveiled details of a two-stage deficit reduction plan that would start with an initial $1.2 trillion in savings over 10 years. Obama is sure to oppose it because it would raise the debt limit for only a few months, something he has said he will not agree to.

Obama's Democrats presented their plan for $2.7 trillion in deficit reduction over the next decade but with a debt limit hike that would carry through the November 2012 elections.

Republicans control the House and Democrats control the Senate.

Long-term problem


Boehner, under pressure from first-term lawmakers aligned with the fiscally conservative Tea Party movement, dismissed the Democratic plan as "full of gimmicks". Senate Democratic Leader Harry Reid insisted "extremists" within the Republican Party must not be allowed to dictate the outcome of the debt impasse.

Neither plan may be enough to avert a downgrade by ratings agency S&P, which has indicated it wants to see a $4 trillion deficit reduction plan over 10 years.

Joining a growing chorus of global concern, the International Monetary Fund urged swift US action on its debt to avert broad negative fallout.

Singapore sovereign wealth fund GIC said it saw a long-term US debt problem and Ng Kok Song, GIC's group chief investment officer, said it was not simply a question of whether Congress was able to lift the borrowing ceiling in time, the Straits Times newspaper reported.

A lower credit rating could raise borrowing costs not only for the US government but also for other countries, companies and consumers because US Treasuries are a benchmark.

Should the impasse in Congress prove unbreakable, some legal scholars say Obama has a constitutional escape hatch at his disposal, although he has expressed reluctance to use it.

He could bypass lawmakers and invoke a little-known clause of the 14th Amendment of the US Constitution, which states that the United States' public debt "shall not be questioned".

Read more on:    barack obama  |  us  |  economy
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