Barack Obama and top Republicans face growing pressure Thursday to surmount acrimonious divisions over how to avoid a debt default as an August 2 deadline looms for raising the national debt ceiling.
The U.S.’s biggest foreign creditor China with more than $1 trillion in Treasury debt as of March, called on the U.S. government on Thursday to adopt responsible policies to protect investor interests.
The Foreign Ministry comments followed a warning by Moody’s Investors Service that it might strip the United States of its gold-plated credit rating in coming weeks if the $14.3 trillion limit on America’s borrowing was not raised.
If the U.S.’s AAA credit rating is cut, it will hit stocks prices all over the world and weakened the dollar. Gold prices pushed to a record high as investors saw the precious metal as a safer place for their cash.
Federal Reserve Chairman Ben Bernanke said on Wednesday that the government’s inability to reach an agreement could send shockwaves through the global financial system. Obama has warned that the U.S. economy could be pushed back into recession.
An economist at KBC Securities in Belgium Koen De Leus said the default risk is political so a last minute U.S. deal would be struck, a view shared by many in financial markets. Koen commented: “But it does create additional nervousness on the top of all other issues like the uncertainty about U.S. growth in the second half of 2011, inflation problems in emerging countries and the European debt problem.”
The prospect of destabilization US economy disturbs investors, including the Chinese government, which fears even a small default could shatter the global economy and sour political relations.
China Foreign Ministry spokesman Hong Lei said at a regular briefing in Beijing: “We hope that the U.S. government adopts responsible policies and measures to guarantee the interests of investors.”
The U.S. talks on Wednesday lasted nearly two hours and were the stormiest yet. The talks ended with Obama telling Republicans that “enough is enough.” The outcome of the talks don’t have just fiscal implications, but also a big implications for the 2012 presidential campaign, where Obama is seeking re-election.
An agreement in the issue of raising America’s debt limit should be reached by August 2. Otherwise the government will run out of money to pay its bills and default on some obligations.
The No. 2 Republican leader in the House of Representatives Eric Cantor said that Wednesday’s meeting became so acrimonious that Obama walked out. He commented: “He said he had sat here long enough. No other president, Ronald Reagan wouldn’t sit here like this.”
With the negotiations at a seeming standstill, Republicans drew a warning of a different sort, from an unlikely source – the party’s Senate leader, Sen Mitch McConnell. He warned fellow conservatives that a potentially catastrophic failure to raise the US debt limit would probably ensure Obama’s re-election next year. McConnell’s comments were fresh evidence of deep Republican division on an issue of paramount importance to the United States and its economy.
Bernanke said on Wednesday debt talks that if the debt limit was not raised in time, the United States would pay its bondholders first. That would mean other payments, such as Social Security to the elderly, would be the first hit. Obama, who has sought to cast himself as a centrist in the debate, accused Republicans of partisan posturing that was keeping the two sides from agreement.
Obama’s 2012 re-election hopes hinge not only on reducing the United States’ 9.2 percent unemployment rate but on his appeal to independent voters who are increasingly turned off by the rancor in Washington and want the country’s fiscal house in order.
Republicans demand $2.4 trillion in spending cuts in return for supporting an increase in the debt limit. Democrats and Obama insist on tax increases for the wealthy as part of a deal. Another round of talks is set for tomorrow at 4:15 p.m. EDT.
Tax will dominate the discussions. The president has set a Friday deadline for agreeing a way forward. Despite the financial and economic concerns, political brinkmanship has continued. [via Reuters, The Australian and Huffington Post]