US '10 days from debt disaster'

Barack Obama told top politicians they must hammer out a deal within the next 10 days to avoid an unprecedented default on US debt.

Mr Obama and the eight top House of Representatives and Senate leaders assembled in the White House Cabinet Room for about 90 minutes during a rare late-night Sunday session, less than 24 hours after House speaker John Boehner abandoned plans to negotiate a massive four trillion-dollar deal for reducing the debt. The group will meet again today.

As the meeting opened, Mr Obama and the leaders sat around the table in casual dress. Asked whether the White House and Congress could “work it out in 10 days”, Mr Obama replied: “We need to.”

The Obama administration has warned that refusal by Congress to raise the $14.3trn debt limit could lead to the first time in history when the US government cannot pay its debts.

The International Monetary Fund’s new chief, Christine Lagarde, said that if the US failed to act, she foresaw “interest hikes, stock markets taking a huge hit and real nasty consequences” for the American and global economies.

“I would hope that there is enough bipartisan intelligence and understanding of the challenge that is ahead of the United States, but also the rest of the world,” she said.

Republicans have demanded that any plan to raise the debt limit be coupled with massive spending cuts to lighten the burden of government on the struggling economy. Higher taxes, Republicans have said from the start, are deal-killers if not offset elsewhere.

But Mr Obama has a long way to go to satisfy politicians in his own party too. Many Democrats are unnerved by the president’s four-trillion proposal because of its changes to Medicare and Medicaid.

Despite Mr Boehner’s preference for a smaller, two trillion-dollar plan for deficit reduction, White House aides said Mr Obama would press politicians to accept the larger deal.

Republicans object to its substantial tax increases and Democrats dislike its cuts to programmes for the elderly and the poor. The aides, however, left room for negotiations on a more modest approach.

“He’s not someone to walk away from a tough fight,” White House chief of staff William Daley said. “Everyone agrees that a number around four trillion is the number that will ... make a serious dent in our deficit.”

But embedded among the tough words was rhetoric that acknowledged the “big deal’s” prospects had become uncertain at best.

“We’re going to try to get the biggest deal possible,” said US treasury secretary Timothy Geithner.

It was an abrupt change from 24 hours earlier when Republicans rejected the four-trillion proposal, the largest of three under consideration, because its tax increases would doom it in the Republican-led House, Mr Boehner said.

The Ohio Republican informed Mr Obama that a package of about two trillion, which bipartisan negotiators had identified but not agreed to, was more realistic.

The statements threw into question the extent to which last night’s meeting would move the talks towards a resolution.

Mr Geithner warned that a package about half the size of the one Mr Obama prefers would be equally tough to negotiate because it too could require hundreds of billions in new tax revenue – an anathema to Republicans. Politicians said that previous bipartisan talks, led by Vice President Joe Biden, identified a fraction of cuts that would be needed even for the more modest packages.

Even so, Mr Boehner insisted the smaller proposals had more realistic chances of passing. One would call for about two trillion in deficit reductions, most accomplished through spending cuts that have been identified but not signed off on by the Biden group.

The package of $2-2.4trn in deficit reduction identified by the Biden-led negotiators would still require Republicans to accept some increase in tax revenue. Republicans walked out of those negotiations after they were unable to accept about $400bn in new tax money that the White House proposed by closing loopholes, ending some corporate subsidies, and limiting the value of deductions for wealthy taxpayers.