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US debt crisis: downgrade or default?

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US debt crisis: downgrade or default?


The White House has said it is working on an unspecified ‘Plan B’ with members of Congress to avoid the risk of the US defaulting on its debts.

But Republican and Democratic leaders remain deeply divided on the type of cuts needed to balance the budget. They are working against a deadline for raising the borrowing limit of next Tuesday.

Investors who have lent $14.3 trillion to Washington are getting nervous. A big chunk has actually been borrowed from money set aside to pay pensions and the cost of health care for elderly Americans. After that the biggest amounts are owed to China, Japan and then Britain.

Analyst Tom Roth of UBS Global Asset Management said hope for a grand plan to get the US economy back on track are fading: “The expectation is that it will be a short-term deal to get us through the next presidential election. It will ultimately not solve any of the longer-term problems that we have from a fiscal deficit perspective. And what that essentially means is that there is a likelihood, I think at this point, that we do see a downgrade of the long-term treasury rating of the United States.”

A downgrade from the current AAA rating would make it more expensive for the US to borrow money; it would also damage Washington’s reputation and the push down the value of the dollar.

Americans are overwhelmingly concerned about the crisis. A recent opinion poll showed 56 percent support a mixture of tax increases and spending cuts that Obama has advocated and Republicans have dismissed.

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