The United States has edged closer to a debt default as Republicans and Democrats deadlocked over competing plans to raise the legal limit of government borrowing just a week before a deadline to act.
Lawmakers have been unable to agree on how to lift the $14.3 trillion debt ceiling by an August 2 deadline, when the United States will run out of cash to pays its bills unless action is taken.
President Barack Obama, in a televised address aimed at rallying public support for a package proposed by Democrats, warned on July 25 that failure to increase the borrowing limit would severely hurt the nation.
"Unfortunately, for the past several weeks, Republican House members have essentially said that the only way they'll vote to prevent America's first-ever default is if the rest of us agree to their deep, spending-cuts-only approach," Obama said. "If that happens, and we default, we would not have enough money to pay all of our bills -- bills that include monthly Social Security checks, veterans' benefits, and the government contracts we've signed with thousands of businesses. For the first time in history, our country's triple-A credit rating would be downgraded, leaving investors around the world to wonder whether the United States is still a good bet."
Markets have been rattled by the debt-ceiling stalemate, with both sides offering competing plans that are unlikely to win bipartisan support.
The price of gold has risen to an all-time high and the dollar has declined on foreign-exchange markets as investors consider the harm a debt default could do to the U.S. economy, and to world growth, if it pushes up the cost of borrowing as expected.
The International Monetary Fund (IMF) has warned that failure to raise the debt ceiling in time could lead to a downgrade in the credit rating of U.S. government bonds and send interest rates soaring.
It says that a default would also have "significant global repercussions" because of the role of U.S. Treasury bonds in world financial markets.
Analysts say a credit-rating cut would likely force up interest rates because investors would demand a higher return for holding U.S. government bonds -- a benchmark for almost all other financial markets.
Obama warned that a default would be like a tax hike on all Americans because it would push up borrowing costs on things like credit-card loans and mortgages. But he sought to assure markets a deal could still be reached between Republicans and Democrats.
"I have told leaders of both parties that they must come up with a fair compromise in the next few days that can pass both houses of Congress -- a compromise I can sign. I'm confident we can reach this compromise," Obama said. "Despite our disagreements, Republican leaders and I have found common ground before. And I believe that enough members of both parties will ultimately put politics aside and help us make progress."
Both Republicans and Democrats insist they will not allow the United States to default. But their commitment has not brought about a compromise plan to lift the debt ceiling.
Republicans are adamant they will not vote for a deal that includes tax increases. House Speaker John Boehner, the top Republican in Congress, on July 25 proposed a two-stage deficit-reduction plan that would start with an initial $1.2 trillion in savings over 10 years.
"You know, I've always believed that the bigger the government, the smaller the people. And right now we've got a government so big and so expensive, it's sapping the drive out of our people and keeping our economy from running at full capacity," Boehner said. "The solution to this crisis is not complicated. If you're spending more money than you're taking in, you need to spend less of it."
But analysts say Boehner's plan is likely to be rejected by Obama because it would raise the debt limit for only a few months, meaning the issue of the debt ceiling would have to be revisited in early 2012, making the politics even more difficult for lawmakers ahead of the November 2012 elections that include a presidential race.
Democrats want to shield Medicare and Medicaid from reductions. They say any cuts in these health-care programs for older or poor Americans must be balanced by changes in the U.S. tax code that generate more revenue in the future.
Democrats formally presented their competing plan for $2.7 trillion in deficit reduction over the next decade with a debt-limit increase to carry through the November 2012 election, when Obama and many lawmakers are up for reelection.
Even if the debt ceiling is raised, allowing Washington to issue more government bonds, there are concerns that more needs to be done to reduce the deficit.
Rating agency Standard & Poor's has warned that it could downgrade the credit rating for the United States unless lawmakers agree on steps to reduce the budget deficit by $4 trillion over 10 years.
based on agency reports