NEGOTIATIONS BETWEEN the White House and Republican leaders yesterday appeared to be nearing a compromise geared at raising the $14.3 trillion debt ceiling and averting a possible default.
Details of the plan negotiated principally by the Republican Senate minority leader Mitch McConnell and vice-president Joe Biden were sketchy. However it resembles Bills proposed last week by the Democratic Senate majority leader Harry Reid and the Republican speaker of the house John Boehner. Those Bills cancelled each other out in congressional votes during a tumultuous weekend on Capitol Hill.
The first US default in history could be expected to raise interest rates, devalue the dollar, alter the US’s AAA credit rating and possibly provoke a stock market crash.
Regardless of whether a financial default is averted, a political default of sorts has already taken place.
In his weekly radio address on Saturday, US president Barack Obama said the nation risked losing its sterling credit rating “not because we didn’t have the capacity to pay our bills, we do, but because we don’t have a triple A political system to match it”.
The despondent mood in Washington turned when Mr Reid announced that talks between Mr McConnell and Mr Biden had made significant progress.
“I think I can pretty confidently say that the current plan under discussion will provide a debt ceiling increase to avoid default,” Mr McConnell said yesterday.
The pending deal gives Republicans almost everything they wanted. Mr McConnell said he was close to being able to recommend to “my members that this is something that they ought to support”.
The two-step deal would impose about $1 trillion in government spending cuts and raise the debt ceiling immediately by a comparable amount. It would create a special committee of six Democratic and six Republican congressmen to identify deeper cuts before the end of the year. The extent of the second increase in the debt ceiling would be tied to the scope of the next set of cuts.
Democrats have agreed to a congressional vote on a balanced budget amendment later this year, as demanded by Republicans, but the compromise would not require that the amendment be passed before the second increase in the debt level.
Mr Obama promised to veto any deal that would require a repeat of the present debate. In exchange for allowing the ceiling to be raised without a second vote next winter, Republicans demanded that a fail-safe mechanism ensure that promised spending cuts take place.
The conditions of that “trigger” were the last hurdle impeding conclusion of the deal.
If the committee cannot reach agreement on sufficient additional cuts prior to the second increase in the debt ceiling, the agreement will require automatic spending cuts of up to 4 per cent across the board in all government spending.