US PRESIDENT Barack Obama and vice-president Joe Biden discussed the debt ceiling with the leaders of the Senate and House of Representatives at the White House last night.
The talks took place hours after treasury secretary Timothy Geithner warned that failure to reach agreement within three weeks would wreak “catastrophic damage” on the US economy.
As the world contemplates what will happen if the unthinkable happens – if the US defaults on its debt – Mr Geithner told CBS News: “There has to be a deal; failure is not an option.”
Yet the rift between Republicans and Democrats grew wider at the weekend. On Saturday night, House Republican leader John Boehner pulled back from attempts to reach a broad agreement that would raise the $14.3 trillion debt ceiling before the August 2nd deadline, in exchange for a $4 trillion reduction in deficit spending, as demanded by Republicans.
Mr Boehner blamed his reluctance to go for the “big deal” on Democrats’ insistence that increased revenue – taxes – be part of the mix; not just spending cuts. Republican resistance to raising taxes is so ingrained that Mr Boehner preferred a “small deal”, reducing the deficit by only $2 trillion to $3 trillion, with no increased revenue.
Mr Obama tried last night to persuade Republican leaders of the necessity of working together for a big deal. “To back off now will not only fail to solve our fiscal challenge, it will confirm the cynicism people have about politics in Washington,” White House communications director Dan Pfeiffer said. “The president believes that now is the moment to rise above that cynicism and show the American people that we can still do big things.”
Last December, Mr Obama concluded an agreement with Senate Republican leader Mitch McConnell to prolong Bush-era tax cuts for the rich until 2012. But Mr Obama swore it was for the last time. Now the president’s attempts to balance cuts in social spending with taxes on corporations and the wealthiest Americans has put him on a collision course with Republicans.
Mr Boehner is under pressure from fellow Republicans not to compromise. Close to 36 Republican representatives and a dozen Republican senators have signed a pledge not to raise the debt ceiling unless Congress passes a balanced budget amendment.
Congress has raised the debt ceiling 74 times since March 1962, including 10 times in the past decade. But the right-wing Tea Party is insistent when it comes to cutting government spending. “It’s time for tough love,” the founder of the House Tea Party caucus and presidential candidate Michele Bachmann said on Saturday. “Don’t let them scare you by telling you that the country’s going to fall apart.”
Other leaders in the finance sector echoed Mr Geithner’s warning. “It would be a real shock, and it would be bad news for the US economy,” newly elected IMF chief Christine Lagarde told ABC News. “So I would hope that there is enough bipartisan intelligence and understanding of the challenge that is ahead of the US, but also of the rest of the world.”
Ms Lagarde predicted nasty consequences which could include higher interest rates and unemployment, a drop in the stock markets and falling investment if a deal is not reached by August 2nd. “It would certainly jeopardise the stability, but not just the stability of the US economy; it would jeopardise the stability at large,” she added.
Mr Obama’s chief of staff, former commerce secretary Bill Daley, said there was “no question in my mind that the leaders of America will not allow the first default in the history of the country to occur”.
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