Rival U.S. debt plans pushed as deadline looms

By @ibtimes on

Lawmakers were locked in a standoff on Monday over dueling debt plans that offered little prospect for compromise, increasing the threat of a ratings downgrade and national default that could sow chaos in global markets.

Little more than a week before the August 2 deadline to raise the $14.3 trillion debt ceiling, President Barack Obama's Democrats and their Republican rivals pursued separate budget proposals in Congress, with no clear path to bring them together.

The impasse rattled investors worldwide, sending stocks and the dollar down and pushing gold to a record high, but falling far short of the panicky sell-off that some politicians in Washington had feared after weekend talks broke down.

Details emerged of the House of Representatives Republicans' two-stage deficit reduction plan that would start with an initial $1.2 trillion in savings over 10 years. It is sure to be rejected by Obama because it would raise the U.S. debt limit for only a few months, meaning the issue likely would have to be revisited early next year.

Democrats detailed their competing plan for $2.7 trillion in deficit reduction over the next decade but with a debt limit increase that would carry through the November 2012 presidential and congressional elections. Republicans appear unlikely to support this approach.

Republicans control the House and Democrats control the Senate.

Neither plan may be enough to avert a downgrade by ratings agency S&P, which has indicated it wants to see a $4 trillion deficit reduction plan over 10 years. Critics said both sides appeared more interested in scoring political points than forging compromise as the 2012 election season gathers steam.

With markets increasingly focused more on the risk of a damaging cut in U.S. Treasury bonds than on the prospects for an unprecedented federal default, the stage was set for growing investor alarm if the stalemate goes down to the wire.

If politicians don't find a solution right now, we are facing a disaster of major proportions, said Fidelio Tata, head of U.S. rates strategy at SG Corporate & Investment Banking in New York.

Joining a growing chorus of global concern as the world's largest economy showed signs of legislative dysfunction, the International Monetary Fund urged swift U.S. action on its debt to avert broad negative fallout.

A lower credit rating could raise borrowing costs not only for the U.S. government but also for other countries, companies and consumers because U.S. Treasuries are the benchmark by which many loans are measured. Failure to act on the debt limit could push the United States back into recession.

OBAMA URGES COMPROMISE

Obama, consigned to the sidelines as congressional leaders faced off, told a Hispanic group that both parties have a responsibility to come together and solve the problem. He has vowed there will be no default, raising speculation he might act unilaterally by using an obscure clause in the U.S. Constitution if Congress fails to act.

Obama and congressional leaders have tried to reassure global markets that the country will be able to service its debt and meet other obligations after August 2, when the United States will run out of money to pay all of its bills.

Republican House Speaker John Boehner's plan would raise the debt limit in stages, forcing Congress to confront the politically painful issue again before the November 2012 election, when Obama is seeking a second term.

Boehner will push for legislation to cut $1.2 trillion in spending over 10 years and provide a short-term, $1 trillion increase in the government's borrowing limit but include no tax increases. Obama has said he opposes a short-term debt limit hike and instead wants about $2.4 trillion in new borrowing authority, which would extend through 2012.

Senate Majority Leader Harry Reid, a Democrat, laid out a $2.7 trillion spending-cut plan that includes large savings from domestic and defense programs to try to break the impasse and would provide borrowing authority to meet needs through 2012. It would include $1.2 trillion in savings that Democrats say Republicans already had agreed to.

The White House quickly endorsed Reid's approach and told the Republicans that the ball is in their court.

The Republicans are more interested in embarrassing the president than doing what is right for the country, Reid told reporters. We should not let these extremists dictate the outcome of this debate or the direction of our country.

Reid's plan amounts to a substantial concession on the part of Democrats, as it includes no tax increases and calls for a level of spending cuts to discretionary spending that Democrats had initially resisted. But it shields from any cuts cherished Democratic programs like the Medicare health insurance program for the elderly and disabled and the Medicaid health insurance program for the poor.

Republicans, driven by the fiscally conservative Tea Party movement that helped them win control of the House last November, strongly oppose any tax increases. The Democrats who control the Senate dislike proposed cuts to popular social programs and want some tax increases.

Ratings agencies have warned that even if Congress raises the debt ceiling and averts a default, they may still strip the United States of its AAA credit rating if lawmakers fail to agree on deeper long-term budget cuts.

Secretary of State Hillary Clinton sought to reassure Asia, which holds close to $3 trillion in U.S. government debt, that the United States would reach a deal and avoid default.

I'm confident that Congress will do the right thing and secure a deal on the debt ceiling and work with President Obama to take the steps necessary to improve our long-term fiscal outlook, she said in a speech in Hong Kong.

(Additional reporting by Richard Cowan, Caren Bohan, Alister Bull, Laura MacInnis and Deborah Charles in Washington, Ryan Vlastelica in New York, Emily Kaiser in Singapore, Yoo Choonsik in Seoul; Editing by Will Dunham)

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