US deadlock continues as default looms

The United States edged closer on Tuesday to a devastating default as Republicans and Democrats deadlocked over competing plans to raise the debt ceiling, one week before a deadline to act.

President Barack Obama, in a televised address aimed at rallying public support for a package proposed by Democrats, warned that failure to increase the US borrowing limit would severely hurt the nation.

'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,' he said in remarks in the East Room on Monday night.

Republican and Democratic lawmakers, despite weeks of intense talks, have been unable to agree on how to lift the $14.3 trillion debt limit by an August 2 deadline, when the country runs out of cash to pays its bills.

Markets have been rattled by the descent of negotiations into an acrimonious stalemate, with both sides offering competing plans that are unlikely to win bipartisan support.    

Gold has been pushed to an all-time high and the dollar has softened as investors weigh the harm a default could do to US and world growth if it pushed up borrowing costs as expected.

'Every day that goes by without a deal will see investors become a bit more defensive,' said Omer Esiner, chief market analyst at Commonwealth Foreign Exchange in Washington.

Obama warned a default would inflict a tax hike on all Americans by pushing up borrowing costs on things like credit card loans and mortgages, but sought to assure markets a deal could still be reached.   

'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. And I am confident we can reach this compromise,' he said.

Rating agency S&P warns it could downgrade the United States unless lawmakers agree on steps to reduce the deficit by $4 trillion over 10 years.

A credit rating cut would be felt around the world. Investors will likely demand a higher return for holding US government debt, a benchmark for almost all other financial markets, forcing up interest rates and sapping asset prices.    

Republicans and Democrats both insist they will not allow the United States to default.

 This commitment has not yielded a plan to lift the debt ceiling, which Republicans say must be accompanied by even larger reductions in spending.    

Democrats want to shield Medicare and Medicaid and say any cuts in these cherished healthcare programs for older or poor Americans must be balanced by changes in the US tax code that generate more revenue in the future.

But Republican lawmakers in the House of Representatives are adamant they will not vote for a deal that includes tax increases, reflecting the determination of Tea Party conservatives elected last year to shrink government. They control the House while Democrats hold sway in the Senate.    

House Speaker John Boehner, the top Republican in Congress, must placate these demands and on Monday advanced a two-stage deficit reduction plan that would start with an initial $1.2 trillion in savings over 10 years.

It is sure to be rejected by Obama because it would raise the debt limit for only a few months, meaning the issue would have to be revisited in early 2012, making the politics even harder for lawmakers with an eye on the November election.

'A six-month extension of the debt ceiling might not be enough to avoid a credit downgrade,' he warned. 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 re-election.

Boehner dismissed the Democratic plan as 'full of gimmicks.' Senate Democratic Leader Harry Reid insisted 'extremists' within the Republican Party must not be allowed to dictate the outcome of the debt debate. The Obama administration has not ruled out invoking the 14th Amendment of the US Constitution to sell debt, even if Congress fails to raise the borrowing ceiling. - Reuters