Political wrangling paralyses US debt talks

Political wrangling paralyses US debt talks
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The United States has just one more week to resolve the federal debt crisis – and avoid a devastating default.

Unless a speedy compromise is reached in Congress on raising the debt ceiling, the Senate and the House of Representatives will not be able to approve the increase in time.

The debt limit of $14.3 trillion was reached in May. Failure to raise it by August 2 means the American Treasury will no longer have enough cash to pay the country’s bills.

But looming large over the negotiations are political considerations. At stake: next year’s battle for the White House.

For President Obama, a temporary deal would lead to more political wrangling that would risk poisoning his re-election campaign.

So, the Democrats are proposing an immediate rise of the debt ceiling by $2.4 trillion, to keep the Treasury afloat after the presidential election.

They have put forward a plan to reduce the deficit by $2.7 trillion over the next decade, while protecting welfare programmes.

Republicans have put forward a two-stage plan: initially increasing the debt ceiling by $1.2 trillion, with an equivalent amount of savings over ten years.

But the rise would not be enough to last through the election and would have to be renegotiated next winter.

That would give the Republicans mileage to attack the Democrats. Buoyed by an influx of Tea Party Representatives determined not to raise taxes, they are pushing their own plan.

“I think it would be irresponsible for the president to veto such legislation because it is a common sense plan and it will help us avoid default. It’s time to get serious about solving America’s problems and I believe our plan is a good step in the right direction,” said the Republican Speaker of the House, John Boehner.

Democrats, in control of the Senate, reject the plans, accusing the Republicans of putting the economy at risk with a short-term deal.

Senate Democratic leader Harry Reid said: “As one market analyst said today, quote: ‘there is a significant risk of downgrade with an agreement that ties further cuts to another vote only a few months down the road’ close quote. It appears to me at this stage that the Republicans are more interested in embarrassing the President than doing what is right for the country.”

Wall Street – like the IMF – is getting twitchy over the ongoing political stalemate.

“I think it’s outrageous. I think both parties should come together and just put the politics to the side and move forward,” said one trader.

Despite the urgent need to do a deal and the consequences of failing to do so, the two sides remain deadlocked.

A downgrade of America’s credit rating would probably oblige the US to borrow money at higher interest rates.

Holders of US government bonds would themselves find it harder to obtain loans.

Interest rate rises would hit US business, sparking an economic crisis that would have a knock-on effect around the world.

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