New initiatives in the balance as US debt ceiling deadline approaches

THE US is a week away from a partial default on its $14.3 trillion debt, with no guarantee that either of the “duelling plans” announced by Republican and Democratic leaders yesterday can gain acceptance in time to avert financial catastrophe.

President Barack Obama yesterday cancelled his appearance at two fundraising events to concentrate on the crisis. The IMF called on US politicians to act urgently to raise the debt ceiling, and stock markets showed signs of nervousness.

Both sides blamed the other when talks between Mr Obama and the Republican speaker of the House of Representatives John Boehner collapsed on July 22nd. Negotiations then shifted from the White House back to Congress, but those attempts also failed on Sunday night, when Senate Democratic majority leader Harry Reid issued a statement saying that “talks broke down over Republicans’ continued insistence on a short-term raise of the debt ceiling, which is something that President Obama . . . and I have been clear we would not support.”

The two-stage plan that Mr Boehner explained to Republican Representatives behind closed doors yesterday would cut nearly $3 trillion in spending in two stages. It would raise this year’s debt ceiling by $1 trillion, then require another vote early next year to authorise another $1.5 trillion in borrowing authority.

The Treasury secretary Timothy Geithner explained the administration’s rejection of a two-stage approach on Sunday, saying: “The most important thing is, we can’t adopt an approach that leaves the threat of default hanging over the country for another six months or so – that would be deeply irresponsible.”

The White House communications director Dan Pfeiffer yesterday posted a blog intended to show the Republicans’ hypocrisy, with a page of quotes from prominent Republicans last month, saying they opposed a short-term solution.

The rival plan announced by Mr Reid calls for $2.7 billion in spending cuts – all gleaned from a draconian draft budget written by the Republican Representative Paul Ryan earlier this year. The latest Boehner and Reid plans are the fourth and fifth put forward this month. The Reid plan contains no tax increases or cuts in entitlement programmes – the two issues which most divide Republicans and Democrats.

Mr Boehner has told Republicans that in order to avoid default, the House would have to vote on legislation by tomorrow. Mr Reid’s plan could clear the Senate by Saturday, leaving two days for House approval and final passage.

In its review of the US economy, the IMF board of directors “highlighted the urgency of raising the federal debt ceiling and agreeing on the specifics of a comprehensive medium-term consolidation programme,” the IMF said. It echoed the position of the Obama administration that “the strategy should include entitlement reforms, including additional savings in healthcare, as well as revenue increases”.

The IMF spoke of “significant global repercussions, given the central role of US Treasury bonds in world financial markets”.

Mr Boehner missed his self-imposed goal of proposing a new plan before Asian markets opened early yesterday. The Tokyo Nikkei average closed down by 0.8 per cent, while the STOXX Europe 600 Banks index fell 1.9 per cent. Stocks in the US also opened lower but they retraced much of the lost ground during the day.