As U.S. default looms, pressure grows to end impasse

Thursday, July 21, 2011

As U.S. default looms, pressure grows to end impasse

Washington, With the United States lurching ever closer to a potentially disastrous default and no agreement in sight, President Barack Obama and top lawmakers face growing pressure on Thursday to speed up efforts to cobble together a deficit-reduction deal.

Negotiators have struggled to break their impasse and narrow the options even as an August 2 deadline looms for raising the government's $14.3 trillion (8.84 trillion pounds) debt ceiling or else rendering the world's biggest economy unable to pay its bills.

There have been glimmers of hope this week for a possible compromise based on a broad deficit-cutting proposal from a bipartisan group of senators that could stave off default and salvage America's triple-A credit rating.

But the stakes are so high and the divide so wide between the Democratic president and his Republican rivals that negotiations could go down to the wire early next month.

Obama called congressional leaders to the White House on Wednesday for their first face-to-face debt talks this week in a renewed search for common ground. Afterward, aides were mostly tight-lipped about the discussions.

Obama's separate sessions with Republicans and Democrats came after the White House, in a softening of the president's stance, signalled he could support a short-term increase in the U.S. borrowing limit for "a few days" if lawmakers agreed to a broad deficit reduction deal but needed more time to pass it.

The move reflected the growing political reality that time is short for Congress to approve the kind of massive deficit-cutting plan Obama is seeking before the government's borrowing authority runs out. Failure to act by August 2 could plunge the United States back into recession and send shockwaves through global financial markets.

Democratic and Republican leaders alike have tried to reassure markets that default will be averted, but they are far from agreed on how to do it.

Republicans want any rise in the debt limit to include deep spending cuts, but they oppose any revenue increases. Democrats want tax hikes for wealthier Americans to be part of a deficit-cutting package, an option most Republicans rule out.

The Federal Reserve has been preparing for the possibility of default, ironing out what to do if the government runs out of cash in two weeks, said Philadelphia Federal Reserve Bank President Charles Plosser.

Adding to the sense of uncertainty is the fact that several proposals are being debated. None is guaranteed to pass muster in Congress, where the Republican leadership may be hamstrung by Tea Party conservatives and Obama faces discontent on his own party's left flank.

"Several trains have left the station," White House spokesman Jay Carney told reporters. "It's a decision about which train we'll be riding when we get to the next station."

No face-to-face talks were listed on Obama's schedule for Thursday, though behind-the-scenes negotiations were expected.

The White House said previously that July 22 was the last day a deal could be reached in time to get legislation through Congress, but it has since backed away from that deadline.

Obama is trying to build on momentum from a proposal from a bipartisan "Gang of Six" senators that would cut the deficit by $3.75 trillion and calls for an immediate $500billion in budget savings. But it still lacks many specifics and has yet to be embraced fully by the White House.

Obama Supports "Gang of Six" Deficit Plan

President Barack Obama expressed his support for a deficit-reduction plan put forth by the bipartisan "Gang of Six" senators (BBC), reported to include a blend of new revenues and cuts to military and social spending to reduce the nation's budget deficit by about $3.7 trillion over the next decade. Meanwhile, conservative lawmakers in the House of Representatives passed a "cut, cap, and balance" plan that calls for steep spending cuts, a cap on future spending as a percentage of GDP, and an amendment to the Constitution requiring a balanced budget. Analysts say the bill is a symbolic gesture with no chance of becoming law.

The "Gang of Six" plan may inject new energy into Obama's attempts to achieve a broad deficit reduction compromise (FT) ahead of August 2, after which the government will default on its financial obligations. The bipartisan plan has a good chance of passing the Senate, but it remains to be seen whether it can survive a vote in the House, where conservatives have balked at increasing the government's revenue.

While some suggest the plan has little chance of passing intact (WSJ), other analysts say several components of the deal could be incorporated into a final package. The progress in negotiations is fragile, however, and lawmakers are wary things could easily fall apart in the next few weeks.

Others claim there may not be enough time to finalize any legislation prior to the deadline (NYT)

As the debt-ceiling deadline looms, political wrangling has escalated, but lawmakers are likely to cobble together an agreement that avoids default, says this CFR Analysis Brief.

In this op-ed for the Washington Post, James M. Lindsay writes that a failure to raise the nation's debt ceiling could inflict significant and unnecessary harm to America's ability to wield and project its power in the world.

This article from the Economist discusses the theory of political compromise regarding the debt/deficit negotiations, and presents eight reasons to wonder whether the presumption of a deal is true or not.

As the United States approaches the deadline to raise its debt limit, economists warn of a fiscal crisis and higher borrowing costs for U.S. businesses and homeowners.