Stocks slump on 'fiscal cliff' failure

US and European index futures slumped this morning, Asian shares declined the most in a five-week period and the yen strengthened after US House Republican leaders scrapped a
plan to allow higher taxes in a bid to avoid the "fiscal cliff".

House Speaker John Boehner yielded to anti-tax resistance within his own party, throwing budget negotiations deeper into turmoil. House members and senators won't vote on budget issues until after Christmas, giving them less than a week to reach agreement to avert tax increases and spending cuts set to take effect in January.

The hardening partisan divide makes the path to steering away from the so-called fiscal cliff more uncertain.

"It's cutting it quite close, and the pressure is definitely on the politicians," Shane Oliver, head of strategy at AMP Capital Investors Ltd., which has almost $130 billion (€98.5 billion) under management, said in Sydney. "If they go off the fiscal cliff, the US economy could go into a recession. At stake is the US economy and by implications the global economy."

Mr Boehner called on President Barack Obama and Senate majority leader Harry Reid to come up with legislation to avoid the more than $600 billion of tax increases and spending cuts scheduled to start in January. The Congressional Budget Office has said that a failure to avert those changes would probably lead to a recession in the first half of 2013.

"The president's main priority is to ensure that taxes don't go up on 98 per cent of Americans and 97 per cent of small businesses in just a few short days," White House spokesman Jay Carney said in an e-mailed statement.

"We are hopeful that we will be able to find a bipartisan solution quickly."

Now that Mr Boehner's "Plan B" for addressing the fiscal cliff has crashed and burned, the top US Republican appears to have two remaining options - wash his hands of the entire matter or negotiate a compromise with Democrats that could abandon scores of his fellow Republicans.

The Republican rank and file and Democrats may face an equally stark choice: work together for a change, or plunge together off the cliff.

Mr Boehner tried to ram a "fallback" plan through the House yesterday - a relatively tiny tax increase on millionaires and billionaires - and failed. His rambunctious Republicans, who see opposition to all tax hikes as a matter of bedrock principle and of political survival, refused to go along.

President Barack Obama and his Democrats who control the Senate take the opposite view - tax hikes on the wealthy are a condition for their support of a fiscal cliff Bill. If there is to be a resolution it will largely depend on an improbable scenario - Democrats in the House teaming up with less militant Republicans to back away from the fiscal cliff.

Compromise has been out of style in recent years, and many think it could require some prodding from the markets.

"At this point, I only see one route to avoiding the cliff, a replay of the TARP debacle in 2008," said George Washington University's Sarah Binder, an expert on Congress. In September 2008, the House defeated the bank bailout Bill and the market collapsed, prompting a terrified lawmakers to reconsider and pass it.

"In this case, a harsh market and public reaction would be needed to force the hand of the speaker to negotiate a deal that can pass with Democratic votes," she said.