US debt crisis deepens as House vote meets resistance

Agence France-Presse

Posted at Jul 29 2011 11:29 AM | Updated as of Jul 29 2011 07:29 PM

WASHINGTON - A debt crisis in the world's largest economy deepened Thursday as Republican leaders scrambled to keep their own members in line in a showdown over raising the US debt ceiling.

House Speaker John Boehner was forced to delay a vote on his own plan to avert a potentially catastrophic default, as it became clear that it was facing stiffer than expected resistance from unruly conservative Tea Party lawmakers.

The House recessed while Boehner met one by one with Republican lawmakers to shore up support for his two-step plan to raise the $14.3 trillion debt ceiling enough to avert default for at least six months.

Republican sources insisted, however, that the vote would take place later Thursday. Even if it does pass, Democrats vowed to block it in the Senate in favor of their own plan, which in turn appeared certain to go down to defeat in the Republican-controlled House.

"We believe still, that in the end, and we're getting near the end, but in the end cooler heads will prevail, sanity will prevail in the United States Congress and they will reach a compromise," White House spokesman Jay Carney said on MSNBC television.

With only five days to go until an August 2 deadline when the Treasury says it will run out of funds, IMF chief Christine Lagarde piled on the pressure for a deal saying the dollar's status could be in doubt if the impasse continues.

Stock markets also remained nervous that the fragile economic recovery nurtured since the 2008 global financial crisis could be at risk.

Lagarde warned if the crisis continued: "It would probably entail a decline of the dollar relative to other currencies, and probably doubts in the mind of those people who reserve currencies as to whether the dollar is effectively the ultimate and prime currency of reserve."

Democrats have slammed Boehner's plan which would raise the debt ceiling for just a few months, saying it would only plunge the world's economic superpower back into crisis at the start of the 2012 presidential election year.

A majority of senators has warned they will block the bill if it reaches Senate, and the White House has said President Barack Obama would veto it if it reaches his desk.

Boehner admitted his plan was "not perfect," but he said there were no "gimmicks or smoke screens."

"For the sake of jobs and for the sake of our country, I am asking the representatives in the House in a bipartisan way and asking my colleagues in the Senate, let's pass this bill and end this crisis."

Republican House Majority Leader Eric Cantor also appealed to Democrats, saying Senate Majority Leader Harry Reid had several choices.

"One is to suffer the economic consequences of default, which I hope, which all of us hope, he doesn't choose," Cantor said.

But Reid vowed that the Boehner proposal, which would shave $915 billion off the national deficit over 10 years in return for hiking the debt ceiling by some $900 billion, would fail in the Democratic-controlled Senate.

"No Democrat will vote for a short-term Band-Aid that would put our economy at risk and put the nation back in this untenable situation a few short months from now," he said.

European stock markets ended mixed, weighed down by the debt strains in the United States, after Asian markets slumped earlier in the day.

In the fifth straight day of losses, the Dow Jones Industrial Average dropped 62.44 points (0.51%) to close at 12,240.11.

The broader S&P 500 fell 4.22 points (0.32%) to 1,300.67, while the tech-heavy Nasdaq Composite eked out a slight gain, rising 1.46 points (0.05%) to 2,766.25.

White House officials admitted Wednesday for the first time they are working on a back-up plan to keep the country running if in the worst case scenario, the United States is forced into default.

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.

The heads of Wall Street's top banks, meanwhile, urged Obama and Congress to reach a deal, warning of "very grave" dangers if there is no accord.

The chief executives of Bank of America, Citigroup, Goldman Sachs, JPMorgan Chase, Morgan Stanley, Wells Fargo and other top financial firms wrote in a joint letter that they hoped for a deal this week.

"The consequences of inaction -- for our economy, the already struggling job market, the financial circumstances of American businesses and families, and for America's global economic leadership -- would be very grave."

Democrats have rallied behind a rival plan crafted by Reid which would cut spending by $2.2 trillion over 10 years, and raise the debt ceiling until after the November 2012 elections.