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Markets on edge as politicians dig heels over debt ceiling

Text by News Wires

Latest update : 2011-07-25

Global markets braced for the worst on Monday as US President Barack Obama and a bitterly divided Congress once again failed to negotiate an end to the debt ceiling crisis with an August 2 deadline little more than a week away.

REUTERS - A sharply divided U.S. Congress pursued rival budget plans on Monday that appeared unlikely to win broad support, pushing the United States closer to a ratings downgrade and debt default that would send shock waves through global markets.

With an Aug. 2 deadline little more than a week away, lawmakers have steadfastly refused to compromise, and talks once again collapsed in acrimony at the weekend. Democrats and Republicans split into two camps to work on their own proposals.

After weeks of rancorous talks, finger-pointing and political point-scoring, both sides appeared far apart on a deal to reduce the budget deficit, which would clear the way for Congress to raise its $14.3 trillion borrowing limit.

Asian and European financial markets fell, gold was pushed up to a record high and Wall Street stocks opened lower on the prospect of a first-ever U.S. debt default, which Fed Chairman Ben Bernanke has said would be a “calamitous outcome” for the U.S. and the global economy.

But there was no panic selling that some politicians in Washington had feared after the weekend talks broke down, though market players would not rule out the possibility if the debt stalemate goes down to the wire.

“There’s an old saying that things don’t matter until the day they matter; we’re getting close to the day when it will matter,” said Quincy Krosby, market strategist at Prudential Financial in Newark, New Jersey.

The Dow Jones industrial average, the Standard & Poor’s 500 Index and the Nasdaq Composite Index were all down less than 1 percent in early trading.

President Barack Obama and congressional leaders have tried to reassure global markets that the country will be able to service its debt and meet other obligations after Aug. 2, when the Treasury Department says the United States will run out of money to pay its bills.

‘Do the right thing’

U.S. Secretary of State Hillary Clinton sought to reassure Asia, which holds close to $3 trillion in U.S. government debt, that the United States would reach a deal and avoid default.

“I’m confident that Congress will do the right thing and secure a deal on the debt ceiling and work with President Obama to take the steps necessary to improve our long-term fiscal outlook,” she said in a speech in Hong Kong.

Faced with the prospect of defaulting on debt and the country losing its AAA credit rating, the highest possible, lawmakers set a Monday deadline to show markets a plan.

Republicans, driven by the fiscally conservative Tea Party movement that helped them win control of the House of Representatives last November, strongly oppose tax increases. Democrats who control the Senate dislike proposed cuts to popular social programs and want some tax increases in addition to spending cuts.

The House and Senate appear to be heading for a showdown as their leaders develop competing plans to resolve the crisis.

Democratic Senator Harry Reid aims to raise the debt ceiling by $2.7 trillion, enough to cover the country’s borrowing needs through the November 2012 elections. That would be paired with an equal amount in spending cuts over 10 years -- short of the $4 trillion in deficit savings that experts say would be necessary to keep debt at a sustainable level.

Republican House Speaker John Boehner’s plan would raise the debt limit in stages, forcing Congress to confront the politically painful issue again before the election.

His plan could potentially deliver bigger budget savings through an overhaul of the tax code and a reform of expensive health benefits that are expected to balloon over the coming decade.

Boehner has promised more details on his approach when he meets House Republicans at 2 p.m. (1800 GMT).

 

Date created : 2011-07-25

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