Global fears grow as US deadlock deepens

Congress remains deeply divided as politicians grapple for a debt deal amid warnings of dangers to the world at large

IMF head Christine Lagarde urged the US to show the same “political courage” that Europe showed last week [AFP]

The political and financial crisis gripping the US appeared to have deepened after President Barack Obama and House Speaker John Boehner accused one another of failing to negotiate in good faith to avert an unprecedented default early next week.
The impact of a failure to raise the US borrowing limit could extend beyond its borders and damage the global economy, the chief of the International Monetary Fund said on Tuesday.
In a speech at the Council on Foreign Relations in New York, Christine Lagarde urged US political leaders to show the same “political courage” that European leaders demonstrated last week, when they agreed on several new measures to address that continent’s debt crisis.

But in the US on Tuesday, positions seemed only to harden after Obama and Boehner engaged in an extraordinary joust over fiscal issues that have consumed Washington since a large block of first-term members of the US House of Representatives, elected last year under the mantle of the small-government, low-tax Tea Party, returned the lower chamber to Republican control.

‘Problems with this plan’

With stalemate in the air, Boehner pushed ahead with his two-step plan, a short-term bill to cut spending about $1.2bn and extend the debt ceiling for about six months that could come to a vote on Wednesday.

House Republican leaders scheduled a second vote on Thursday on a balanced-budget constitutional amendment long favored by rank-and-file conservatives.

Amid uncertainty in the House about the spending bill’s prospects, Boehner told reporters, “This was negotiated in a bipartisan manner between both Houses of the Congress. I do think that we are going to have some work to do to get it passed but I think we can do it.”

Conservative Republicans in the House cast doubt about whether there is sufficient backing for the speaker’s plan.

“We think there are real problems with this plan,” said Representative Jim Jordan, who heads the Republican Study Group. He argued that the spending cuts are insufficient and expressed opposition to likely tax increases.

Pointing fingers

In his Monday night speech, Obama said the long and caustic fight was a “partisan three-ring circus”. Boehner, borrowing the president’s very words, said Obama “would not take yes for an answer”.

Their words swept through the national television audience just hours after Boehner offered competing legislation to break the deadlock over raising the Treasury’s ability to continue borrowing money to pay its bills after the current $14.3tn limit expires next Tuesday.

Obama warned of a “reckless and irresponsible” outcome without a compromise by August 2. He urged Americans to make their voices heard and let their representatives know they support “a balanced approach to reducing the deficit”.

Boehner responded that Obama wanted “a blank cheque today” and declared “this is just not going to happen”.’

Obama and the Democrats see it differently, accusing tea party Republicans of putting ideological purity ahead of reality and what’s best for the country.

Threat of downgrade

Also on Tuesday, credit rating agencies such as Standard & Poor’s and Moody’s warned that they will downgrade the United States’ top credit rating if an agreement isn’t reached.

Standard & Poor’s has also said it may reduce the nation’s credit rating if there aren’t steep cuts to the US budget deficit.

Lagarde said a default or downgrade of US. debt “would be a very, very, very serious event not just for the United States but for the global economy at large”.

US Treasury bonds play a “central role” in world financial markets, the IMF said in a staff report on Monday. According to The Associated Press, US Treasury securities have traditionally been seen as the safest investment in the world.

More than $4tn of Treasurys are held by governments in China, Japan and other countries, as well as by private investors. That means higher interest rates on Treasurys could have a massive global impact.

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