US debt deal still elusive as default looms

Agence France-Presse

Posted at Jul 27 2011 07:15 PM | Updated as of Jul 28 2011 03:15 AM

WASHINGTON - The United States remained on course Wednesday for a potentially calamitous default, with US leaders still unable to find common ground on a deal that would let Washington borrow the cash it needs to pay its bills.

The White House and its divided Republican foes have failed to break an impasse that could see the world's richest nation default on its debt, with results that could reverberate around the globe.

The dollar slid Tuesday against key currencies and US stocks fell as markets measured the risk of an August 2 deadline passing without a breakthrough.

Meanwhile, officials from key credit rating agencies were likely at a congressional hearing Wednesday to spell out the perils to the global economy of a US default.

The executives were to appear at a hearing by the House Financial Services Committee to discuss federal oversight of credit ratings agencies, but were sure to be questioned on the ramifications of US debt default and a possible credit rating downgrade on the US and world economies.

Among those on the witness list were Deven Sharma, president of Standard & Poor's and Michael Rowan, Global Managing Director of Moody's Investors Service's commercial group.

Meanwhile, the White House and Republicans clashed Tuesday but failed to end their stalemate, with less than a week to go before the US Treasury says it will run out of cash.

Some analysts said however that recent strong tax receipts meant the United States could have up to two extra weeks of cushion, offering a possible brief reprieve before it could be forced to default.

But even if a default is averted, investors are worried that the standoff could lead to a downgrade of the United States' top-notch credit rating, which would also carry serious economic consequences.

Top Senate Democrats and Republicans cautiously urged compromise even as Republican House Speaker John Boehner struggled to keep his conservative troops in line behind a plan he is crafting to raise the $14.3 trillion US debt limit.

Democratic Senate Majority Leader Harry Reid however declared Boehner's plan "dead on arrival" while the White House vowed to veto the measure in the unlikely event that it clears both houses of Congress.

Boehner insisted his plan, which Obama opposes because it would force another debt-ceiling showdown during the 2012 presidential election campaign, was the only "reasonable approach" -- even as he tamped down a conservative revolt.

But the speaker suffered a setback late in the day when the Congressional Budget Office (CBO), the non-partisan last word in polarized Washington's spending battles, said his bill would not cut as much spending as advertised.

It was unclear how that would affect a vote on the bill, now postponed until Thursday, amid concerns conservatives unsatisfied with the depth of its spending cuts might deny it even a majority of Republicans.

Washington hit its debt ceiling on May 16 but has used spending and accounting adjustments, as well as higher-than-expected tax receipts, to continue operating normally.

If there is no deal, the United States, still recovering from the 2008 recession with unemployment hovering around 9.2%, could be faced with tough choices -- either a debt default or reneging on obligations like government benefits for the poorest, most vulnerable Americans.

Obama has agreed in principle to deep spending cuts, including savings from social safety net programs dear to his Democrats, but Republicans egged on by the Tea Party have refused his call for tax revenue increases targeting the rich and wealthy corporations.

Reid's plan would lift the debt ceiling by $2.7 trillion, lasting to 2013, tied to the same amount of spending cuts over 10 years, and does not include tax increases.

Christine Lagarde, the new head of the International Monetary Fund, said a US default would bring "serious" pain to the global economy and warned: "The clock is irremediably ticking, and people really have to find a solution."

Meanwhile, US markets sank for a third straight day Tuesday, and the dollar plunged to new three-week lows against the euro in Asia on Wednesday because of the stalled debt talks.

Against the yen, the dollar fell to a fresh four-month low in Asia trade, fetching 77.69 yen compared with 77.94 yen in New York.

The euro traded meanwhile at 113.02 yen against 113.00 in New York.

The weakness of the dollar also helped boost currencies in Singapore and Australia, both of which notched record highs against the greenback.