The United States lurched Wednesday toward a potentially ruinous default or painful downgrade of its debt rating, as polarized politicians waged a see-saw battle with a key deadline six days away.
As top lawmakers wrestled behind the scenes with a strategy for a possible 11th-hour compromise ahead of an Aug 2 deadline, the White House said finding a compromise to raise the $14.3 U.S. debt limit was “essential and possible.”
Spokesman Jay Carney, pointing to U.S. Treasury warnings that the world’s richest country will run out of cash to pay its bills come Tuesday, said it was “essential for the health of the economy” to let Washington borrow more.
Worried global markets feared the stalemate’s possibly disastrous effects on the world economy, with U.S. stocks dropping for the fourth straight trading session while investors seeking safe haven briefly sent gold to a new record.
The Democratic-led Senate and Republican-held House of Representatives warred over rival plans that both tied spending cuts to an increase of the $14.3 trillion debt limit but some hinted they could see a way forward.
“Magic things can happen here in Congress in a very short period of time, under the right circumstances,” said Democratic Senate Majority Leader Harry Reid, author of one of the approaches the White House favors.
But even a breakthrough deal to lift the debt limit might not spare the United States from losing its sterling Triple-A debt rating, a downgrade that could raise interest rates across the already ailing US economy, analysts said.
“There has to be a credible plan to reduce the debt burden as well as the deficit levels,” said Standard & Poor’s president Deven Sharma.
U.S. stock markets sank and Treasury bond prices fell slightly under the weight of the stalemate, with the Dow Jones Industrial Average down 1.6% and the Nasdaq diving 2.7%.
After steadily falling against the euro since July 18, the dollar regained about 1.4 cents to $1.4374. It also regained slightly against the Swiss franc, which with gold has been the favored safe-haven in recent weeks, and against the Japanese yen.
Gold surged to $1,628.05, beating Monday’s record, before dropping back to the $1,615 level.
Republican House Speaker John Boehner raced to save his own debt-ceiling bill, winning over skeptical conservatives who just a day earlier had pronounced it unacceptable but now described it as increasingly appealing.
“We can’t let the perfect be the enemy of the doable,” said Republican Representative Blake Farenthold, who told reporters he had “shifted from leaning no, to leaning yes” in a vote now expected on Thursday.
Boehner was re-writing his measure to boost its spending cuts over ten years, which he has said must be greater than the amount of the debt limit increase in order to show the world that Washington will get its fiscal house in order.
But Boehner’s plan would force another debt-ceiling showdown during the 2012 presidential election, something Reid and President Barack Obama fiercely oppose, while tying future debt increases to more spending cuts.
Reid’s plan aims to put off the next debt standoff to after the election and does not include Obama’s call for raising taxes on the rich and on big corporations, a compromise in the face of lockstep Republican opposition.
But his plan, too, came up short in the assessment by the CBO, the last word in Washington’s angry spending fights.
Senate Finance Committee Max Baucus said that Boehner’s bill would die in the Senate if passed by the House and predicted an endgame that would see lawmakers “modify” Reid’s bill to make it more appealing to Republicans ahead of a scheduled month-long August break.
“The world still is run by deadlines, there are debt limits and recesses. The two together are going to help us put this together. Those little jet fumes are going to get stronger and stronger,” he quipped.
Washington hit its debt ceiling on May 16 but has used spending and accounting adjustments, as well as higher-than-expected tax receipts, to continue operating normally.
If there is no deal, the United States, still recovering from the 2008 recession with unemployment hovering around 9.2%, would have to cut some 40% in spending, setting up a choice between debt payments and programs like government benefits for the poorest, most vulnerable Americans.
Asked about the potential for catastrophe, Farenthold told reporters: “Hopefully we’ll have this done by Tuesday… let’s quit foolin’ around.”
© 2011 Agence France-Presse