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Obama seeks 'Plan B' as debt plans stall

Washington , July 27, 2011

A Republican plan to cut the US deficit faced delay and stiff opposition on Wednesday,  raising the risk of default and a ratings downgrade as the clock ticks towards a deadline less than a week away.

Deeply divided Republican and Democratic leaders are scrambling to find common ground before August 2, when the government is expected to hit its $14.3 trillion borrowing limit that could trigger a default and roil world markets.

Even if that fate is avoided, a budget plan that flinches from hefty cuts in the deficit could result in a downgrade of America's top-notch credit rating, raising borrowing costs and dealing a severe blow to the country's weak economic recovery.     

After weeks of acrimonious debate, the contours of a possible deal have emerged but Republicans and Democrats are digging their heels in on some key demands and blaming each other for putting politics ahead of the national interest.     

Lawmakers need to carve out a budget plan to clear the way for Congress to raise the borrowing limit.     

The chances of a quick resolution receded after a vote on a deficit plan by the top Republican in Congress was pushed back to Thursday from Wednesday.

Republican Speaker John Boehner rushed to rework his bill after an analysis found it would cut spending by $350 billion less than the $1.2 trillion over 10 years he had claimed.

President Barack Obama has threatened to veto the Boehner plan and top Senate Democrat Harry Reid described it as "dead on arrival."     

The plan has also failed to win the backing of conservative Tea Party Republicans, who have steadfastly refused to back tax rises and want much heavier cuts to social programs that are traditionally protected by Obama's Democrats.

The White House said on Tuesday it was working with Congress to craft an unspecified "Plan B," providing a glimmer of hope that an 11th-hour deal could be reached as lawmakers feel the pressure from increasingly anxious financial markets.

The gridlock dragged global stocks down on Wednesday, particularly in Europe. Worried investors shifted funds into traditional safe havens gold and the Swiss franc , which both rose to record highs in dollar terms.

The cost of insuring against a US debt default in the next year increased to a record high. Still, there have been no signs of panic in markets because most investors expect a deal will be struck by the deadline.

"The market is expecting both sides to take it to the edge, to push it as long as possible given the politics and given the cost to any side which backs down and loses one of its core interests too early on," said Stephen Green, head of research for Greater China at Standard Chartered Bank.

However, the bank's Chinese clients take a more pessimistic view on America's longer-term fiscal health, Green said. "Many of them look at the politics in the US and see that it's so dysfunctional that they're losing hope that the US can actually get its fiscal house in order," he told Reuters.

Failure to reach a deal would have major implications. A Japan central bank policymaker warned a US default or a  ratings downgrade would be felt well beyond the United States.

"As the world's biggest economy, the US would have an immeasurable impact on global financial markets and Japan would not escape the damage," said Hidetoshi Kamezaki, a board member of the Bank of Japan.

France's budget minister, Valerie Pecresse, urged Washington to come to an agreement. "The global economy needs an American agreement," the minister said.  - Reuters




Tags: Republicans | Obama | US debt deal |

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