America's feet of clay

A Republican plan to try to break a congressional deadlock over raising the US debt limit stumbled amid delays and a revolt by fiscal conservatives on Tuesday, narrowing the chances for a deal to avert a default.

A week before a deadline for Congress to raise the $14.3-trillion borrowing limit, lawmakers have held out hope for a compromise even as rival Republican and Democratic proposals have paralysed Washington and triggered nervousness over the risks of a downgrade to the top-notch US credit rating.

But serious discussions looked to be delayed for several days after Republicans pushed back a House of Representatives vote on their plan originally expected for Wednesday.

The deficit reduction plan presented by the House Speaker John Boehner, the top Republican in Congress, had already faced a likely veto by President Barack Obama and a certain death in the Democratic-controlled Senate.

Staffers scrambled to rewrite the Boehner Bill after an analysis by non-partisan budget experts found it would not deliver the level of spending cuts it promised.

The vote will now be delayed until Thursday at the earliest, meaning Congress will almost certainly be negotiating right up until the August 2 deadline when the Treasury Department has said it will run out of borrowing room.

Analysts say the government may have enough cash on hand to pay its bills until the middle of the month.

Boehner was also facing an insurrection against his plan from lawmakers in his own Republican ranks who are aligned with the fiscally conservative Tea Party movement.

While most expect a last-minute accord to avert the first default by the United States, the bitter partisan squabbling and absence of a political consensus on long-term deficit reduction has increased the likelihood of an unprecedented downgrade in the gold-plated US credit rating.

“We’re still at at least 50% possibility of a downgrade,” David Beers, managing director of Sovereign and International Public Finance Ratings at credit ratings agency Standard & Poor’s, told CNBC.

The gridlock is unnerving investors worldwide. U.S. stocks and the dollar fell on Tuesday while gold hovered near record highs.
But there was no sign of panic as markets held out hope the logjam could still be broken.

‘Contours of compromise
Amid hopes that a compromise can still be forged before the August 2 deadline, Boehner has been in touch with his counterpart in the Senate, Democratic Leader Harry Reid, but aides said they would not expect talks to restart in earnest until Boehner’s Bill passes or fails in the House.

White House senior adviser David Plouffe said earlier on Tuesday the rival plans advanced by Boehner and Reid could yield common ground.

“The Boehner and Reid proposals have quite a lot of similarities,” he said. “You can see how there could be the contours of compromise.”

Lawmakers from both parties also said a compromise was possible.

But the polarising debate has laid bare the ideological divide as each side seeks to blame the other for persistent economic and fiscal woes ahead of the November 2012 election, when Obama is seeking a second term.

Republicans control the House and Obama’s Democrats control the Senate.

Even if a default is avoided, a credit downgrade would undermine confidence in US solvency, stunting economic recovery prospects and sending negative ripples through the international financial system where US bonds are bellwethers. The world’s largest economy risks being viewed as a dysfunctional giant with feet of clay.

A Reuters poll showed that 30 of 53 economists surveyed over the past two days said the United States will lose its top-notch credit rating from one of the three big ratings agencies—Standard & Poor’s, Moody’s and Fitch. Most said the wrangling already has damaged the economy.

Executives from Standard & Poor’s and Moody’s Investors Service are scheduled to testify to Congress on Wednesday on attempts to reform the credit rating industry and the role it is playing in the US debt ceiling debate.

Avoiding ‘pain and hardship’
The delay to the vote on the Boehner plan followed the publication of an analysis by the non-partisan Congressional Budget Office that said his plan would save $850-billion over 10 years, not the $1.2-trillion he claimed.

At least 10 Republican lawmakers aligned with the Tea Party have told Reuters they plan to vote against the Boehner measure. No more than 22 Republicans can vote against the Bill if it is to pass without Democratic help.

The stalemate in Washington is already having an effect on investors, with some starting to take cash out of the market and shifting away from some long-term investments.

“The time for Congress to act is now,” the US Chamber of Commerce said in a letter to House members.

Some of the largest US pension funds and investment firms sent an open letter to Obama and Congress urging them to resolve the deficit impasse and avoid inflicting “pain and hardship” on the nation.

There were clear signs too that ordinary Americans were beginning to wake up to the dangers of the debt deadlock.

Obama, in an address to the nation late on Monday, warned that a default would mean the government would not be able to pay bills including monthly Social Security checks, veterans’ benefits and contracts with thousands of businesses.

A Reuters/Ipsos poll found Americans are overwhelmingly concerned about the debt crisis and a majority—56%—back a combination of tax hikes and cuts to government programs that the president has promoted and Republicans have rejected.

Big banks are preparing for the real possibility that the United States will lose its top credit rating, which they said would cost the country $100-billion in higher interest payments and hurt consumers and the economy. - Reuters

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