The ‘dire’ consequences of default

The United States’s debt crisis has moved closer to disaster as the ­battle between Barack Obama and the Republicans has intensified and talks appear to have reached a stalemate.

With no compromise in sight over a deal to increase the US’s borrowing limit ahead of an August 2 deadline, International Monetary Fund chief Christine Lagarde warned that the political impasse in Washington would have serious consequences for the world economy.

“The clock is ticking and clearly the issue needs to be resolved immediately,” Lagarde told the Council on Foreign Relations think-tank.

Her warning came after the row over the national debt reached a new level on July 25, when Obama and Republican House speaker John Boehner addressed the nation about the looming debt crisis.

With less than a week left until the deadline that could result in the US defaulting on its debt for the first time in its history, Obama expressed dismay over the standoff: “It is a dangerous game we’ve never played before and we can’t afford to play it now.

“Not when the jobs and livelihoods of so many families are at stake. We can’t allow the American people to become collateral damage to Washington’s political warfare.”

A week ago, the two men were in private negotiations on what Obama called “a balanced approach” and he said the only reason it wasn’t “on its way to becoming law right now is because a significant number of Republicans in Congress are insisting on a different approach, a cuts-only approach, an approach that doesn’t ask the wealthiest Americans or biggest corporations to contribute anything at all”.

He rejected a Republican proposal for a stop-gap deal, saying it would simply mean them returning again next year to use the same tactics to seek more cutbacks.

Boehner went live on television, saying: “The sad truth is that the president wanted a blank cheque six months ago and he wants a blank cheque today. That is just not going to happen.” He said he had attempted to work with the president, but Obama “would not take ‘yes’ for an answer”.

Financial markets have reacted nervously to the debt crisis, but economists said they appeared to be betting that the fight was largely political posturing and likely to be resolved.

If the two sides cannot reach a solution by next week, the government will run out of cash and have to stop paying many of its bills. Gus Faucher, the director of macroeconomics at Moody’s Analytics, said the consequences would be dire. “This could push us back into recession,” he said. “It would be a stupid, self-inflicted wound.”

Ken Goldstein, economist at the Conference Board, said stock markets seemed to perceive that a stop-gap solution was inevitable: “Asking them to do more than bungle through is asking them to do more than they are capable of.”

Some political pundits believe Tuesday’s deadline may pass without a resolution. Joshua Trevino, the author of the conservative Redstate blog, said many Republicans were convinced it was better in the long term to block any rise in the American debt and Democrats were convinced Republicans were damaging their political chances with their refusal to compromise. —

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Ewen Macaskill
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