United States lawmakers failed to achieve a budget breakthrough on Sunday and instead worked on rival plans in an impasse that heightened prospects for a catastrophic US debt fault.
With time running out, Republican and Democratic lawmakers split into opposite camps and held talks among themselves. There were no signs of a deal emerging to head off a default in nine days that could trigger global economic calamity and downgrade America’s triple-A credit rating.
After weeks of rancorous talks, finger-pointing and political point-scoring, both sides appeared further apart than ever 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 US can borrow. The US Treasury says it will run out of money to pay the country’s bills after August 2.
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 of Representatives last November, strongly oppose tax increases, while Democrats dislike proposed cuts to popular social programs.
Lawmakers missed a self-imposed deadline of producing a deficit-reduction deal by the time Asian markets opened on Sunday, but planned to outline proposals on Monday.
President Barack Obama 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.
Edgy markets responded to the stalemate, but not in dramatic fashion.
Although some had predicted global markets would fall apart without a deal before the Asian markets opened on Sunday evening, the reaction 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 legislators 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.
“I also think damage is being done by setting deadlines that aren’t going to be met,” he said.
“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,'” Republican representative Jack Kingston told Reuters.
A plan that Senate Democratic leader Harry Reid carried to the White House for a meeting with Obama offered one way out of the crisis.
It would cut $2.5-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, when Obama and other lawmakers are up for re-election.
Significantly, Reid’s plan does not raise tax revenues, which is in line with Republican demands that no tax increases be included. Without including tax revenues, however, it would violate Obama’s principle that any deal be balanced between cuts and more taxes.
While leaving most of the major expensive “entitlement programs” such as Medicare, Medicaid and social security untouched, the Senate Democratic plan, according to an aide, would extract some savings from benefit programs such as those for farmers.
Reid hopes to send the measure to the Senate floor for passage early this week, the aide said.
A White House official said after Obama met Reid and House of Representatives Minority Leader Nancy Pelosi that the trio reiterated their opposition to a short-term debt limit increase, which Republicans persist in floating.
House Speaker John Boehner gave fellow Republicans a progress report on his efforts to forge a plan.
He wants a two-stage strategy that would give the Treasury only about $1-trillion in additional borrowing authority, forcing another debt-limit battle early next year.
Boehner told the Republicans a key obstacle is that Obama wants a $2.4-trillion debt limit increase all at once to last through the 2012 election, “without any guarantees that we’re going to cut more than $2.4-trillion in spending”.
He said he believed both parties agree that significant spending cuts are needed and urged unity among Republicans.
“It’s going to require some of you to make some sacrifices. If we stand together as a team, our leverage is maximised, and they have to deal with us. If we’re divided, our leverage gets minimised,” he said, according to a source familiar with the conference call Boehner conducted.
White House chief of staff Bill Daley warned that there would be a “few stressful days” ahead for financial markets, with the deadline to lift the US borrowing limit drawing ever closer.
Treasury secretary Timothy Geithner did the Sunday television morning show circuit to reassure markets that the US would not default. — Reuters