US edges closer to debt default

2011-07-25 11:00
Washington - A sharply divided Congress pursued rival budget plans on Sunday that appeared unlikely to win broad support, pushing the United States closer to a debt default that would reverberate around the world.

With time running out, Democrats and Republicans split into two camps and held talks among themselves. Both sides appeared unwilling to compromise to head off a default that could trigger global economic calamity and strip America of its coveted Triple-A credit rating.

Lawmakers missed a self-imposed deadline to produce a deficit-reduction deal by the time Asian markets opened on Monday, despite fears investors would finally lose patience and punish Washington for its gridlocked political system.

But the markets surprised with only a mild rebuke, even though the August 2 deadline for action was only nine days away.

After weeks of rancorous talks, finger-pointing and political point-scoring, both sides appeared still far apart on a broad deficit reduction deal that would clear the way for Congress to raise the $14.3 trillion debt ceiling.

The congressionally set debt ceiling caps how much the United States can borrow. The US Treasury says it will run out of money to pay the country's bills by August 2.

Boehner plan a "non-starter"

President Barack Obama on Sunday heard details of a Senate Democratic plan that would rely on spending cuts, not new tax revenue, which would violate one of his key demands.

House of Representatives Speaker John Boehner, the top Republican in Congress, meanwhile advocated a two-stage strategy that would require lawmakers to raise the debt limit again early next year - as Obama, a Democrat, runs for re-election.

Ratings agencies have already made clear they would oppose a short-term debt ceiling increase and Senate Democratic leader Harry Reid called Boehner's plan a "non-starter".

Plans to cut hundreds of billions of dollars from the national debt have been proposed and then quickly discarded as the debate has degenerated into an ideological battle with both sides increasingly dug into entrenched positions.

Republicans, driven by the fiscally conservative Tea Party movement that helped them win the House last November, strongly oppose tax increases, while Democrats who lead the Senate dislike proposed cuts to popular social programmes.

Obama, struggling to bring down the 9.2% US jobless rate, and Republicans will face voter outrage if a compromise cannot be found in the high-stakes drama.

Markets wary


Asian market reaction to the continued stalemate in Washington was relatively modest as investors pulled out of riskier investments like stocks and headed for safe haven assets like gold, pushing the metal to a new record.

US stock futures fell, signalling a poor open for US markets and showing that investors were increasingly worried about the failure of lawmakers to coalesce around one approach. Early currency trading suggested a move away from the US dollar, with the biggest drop in the greenback coming against the Swiss franc.

"The fact that they seem to be jumping from one type of proposal to another and not converging on anything is beginning to worry markets," said Steven Englander, head of G10 FX strategy at Citigroup.

Republican Representative Jack Kingston summed up the mood: "This is a like a long labour, with the dad in the waiting room, waiting to see if it's a boy or a girl and the doctor's coming out and saying 'I can't tell you yet'."

Financial markets have been betting the United States will not default, but investors are deeply worried that the US's credit rating will be cut if Congress and the White House fail to craft a long-term deficit reduction plan that satisfies the ratings agencies.

So while markets are keeping their cool now, as days tick by with no deal in sight, the United States could begin to pay the price for inaction with investors moving out of the dollar and Treasuries.

Two-stage strategy

A downgrade would force up the cost of US borrowing, hurting an already weak economic recovery and possibly pushing the country back into recession. With the United States one of the main engines of the global economy, the fallout would be felt worldwide.

Reid's Senate plan envisions a cut of $2.7 trillion in government spending over a decade to allow for a vote to raise the $14.3 trillion US debt ceiling by August 2 and extend the government's borrowing authority through 2012.

Significantly, his plan does not raise tax revenues, which is in line with Republican demands. Without including tax revenues, however, it would violate Obama's principle that any deal be balanced between cuts and more taxes on the wealthy.

Boehner's two-stage strategy would see Congress raise the debt limit by about $1 trillion, with a similar amount of cuts to annual discretionary spending. That would give lawmakers roughly seven months to overhaul the tax code and wring further spending cuts from social benefit programmes like Medicare.

Boehner is due to outline his plan on Monday afternoon.

With the clock ticking, it was unclear how the two bills, if they pass their respective chambers, would be merged into one measure that Obama could then sign into law.

Read more on:    barack obama  |  us  |  economy
NEXT ON NEWS24X
SHARE:

Read News24’s Comments Policy

24.com publishes all comments posted on articles provided that they adhere to our Comments Policy. Should you wish to report a comment for editorial review, please do so by clicking the 'Report Comment' button to the right of each comment.

Comment on this story
0 comments
Add your comment
Comment 0 characters remaining
 

Inside News24

 
/News
 

Joburg hot spots for cocktails, craft beer, tapas and wine!

It’s the season to be jolly – so we’ve rounded up some new Joburg hot spots!

 
 

I love summer.24

The craziest deaths of 2014
How to make this a sensual, sexy summer!
This is what South Africans Googled in 2014!
This hilarious song is your new holiday anthem

Jobs in Cape Town [change area]

Property [change area]

HOUSES FOR SALE IN Hermanus

Houses R 2 680 000

HOUSES FOR SALE IN Paarl

Houses R 2 690 000

Travel - Look, Book, Go!

Kalahari.com - shop online today

2DAYS ONLY – 30% off Appliances

Coffee makers, blenders, fans, juicers and more. T&Cs apply. Shop now!

2 DAYS ONLY – 40% off books

Get 40% off when you buy 2 books. For two days only! T&Cs apply. Buy now!

Up to 50% off on outdoor gear

Save on chairs, blankets, cooler bags, umbrellas and more. Shop now!

Save on Samsung

Cameras, mobile phones, TVs, Tablets and more. While stocks last. Shop now!

Grand Theft Auto 5

Now available on PS4, Xbox One and PC from R649. Buy now!

OLX Free Classifieds [change area]

Samsung Galaxy s4

Mobile, Cell Phones in South Africa, Western Cape, Cape Town. Date October 24

Best bargain in big bay

Real Estate, Houses - Apartments for Sale in South Africa, Western Cape, Cape Town. Date October 25

VW Golf 6, 1.6 Trendline (Excellent condition)

Vehicles, Cars in South Africa, Western Cape, Cape Town. Date October 25

Horoscopes
Aquarius
Aquarius

You may be emotionally defensive or reserved today. You need to step up today as there may be extra responsibilities to deal with....read more

There are new stories on the homepage. Click here to see them.
 
English
Afrikaans
isiZulu

Hello 

Create Profile

Creating your profile will enable you to submit photos and stories to get published on News24.


Please provide a username for your profile page:

This username must be unique, cannot be edited and will be used in the URL to your profile page across the entire 24.com network.

Settings

Location Settings

News24 allows you to edit the display of certain components based on a location. If you wish to personalise the page based on your preferences, please select a location for each component and click "Submit" in order for the changes to take affect.








Facebook Sign-In

Hi News addict,

Join the News24 Community to be involved in breaking the news.

Log in with Facebook to comment and personalise news, weather and listings.