Party rivals in talks to avert US debt default

REPUBLICANS and Democrats rushed to rework rival deficit reduction plans yesterday, but, with the fate of both proposals heavily in doubt, top lawmakers pursued a behind-the-scenes compromise to avert a crippling US debt default.

With the deadline less than a week away, global stock markets fell sharply on growing fears that the two sides will fail to break the stalemate. That would mean the United States would not be able to borrow more money after August 2 and could run out of cash to pay all of its bills.

Even if a deal is reached to raise the $14.3 trillion US debt ceiling, a budget plan that flinches from hefty cuts in the deficit may result in a downgrade of America’s top-notch credit rating, which could sow financial chaos worldwide.

Against this backdrop, congressional leaders scrambled to find common ground, but complications surrounding their competing proposals could mean efforts to forge a compromise will go right down to the wire.

The prospect of a quick resolution suffered another blow when a vote on a deficit reduction plan offered by House of Representatives Speaker John Boehner, the top Republican in Congress, was pushed back to today amid a mutiny by some fiscal conservatives in his own party, as well as opposition from Democrats.

A separate plan crafted by Senate Majority Leader Harry Reid, a Democrat, also faced a setback yesterday when the non-partisan Congressional Budget Office said the proposal would cut $2.2tn from deficits, about $500bn less than Democrats had claimed.

Boehner rushed to revise his two-step proposal after a CBO analysis found it would cut spending by $350bn less than the $1.2tn over 10 years he had claimed. Obama opposes it because it would extend borrowing authority only until early next year, risking a rerun of the debt impasse during the 2012 election campaign when the president seeks a second term.

Amid the political brink-manship, the two parties have been having ongoing talks about how to break the impasse, Democratic Senator Kent Conrad said.

“One thing I’m quite confident of is we are not going to default. Leaders on both sides recognise now that would be a disaster.”

Signalling a potential for compromise, Reid said when asked if the two plans were the only options: “We can change any one of them very easily.” But Reid said every Democratic senator would vote against the current Boehner proposal if it is passed by the House and goes to the Senate.

Meanwhile, the gridlock dragged global stocks down yesterday, particularly in Europe. Major US exchanges slipped by 1% or more on nervousness over unfavourable company news and the faltering debt talks.

Still, there has been no panic in markets because most investors expect a deal struck by the deadline.