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Americas

Dueling parties debate debt plans as deadline looms

Video by FRANCE 24

Text by FRANCE 24

Latest update : 2011-07-28

Republicans and Democrats have only a few days to reach an agreement on the US debt crisis—or possibly face default. FRANCE 24 takes a closer look at a situation that is getting down to the wire.

Is the United States, for the first time in its history, headed toward default? Earlier in the week, Republicans and Democrats once again failed to find a compromise on raising the debt ceiling after the $14.3-trillion borrowing limit was reached last May. If an agreement is not forged this week, Washington will no longer be able to borrow the money it needs to pay for the expenses and programs Congress mapped out in its yearly budget.

Though economists agree that the situation is worrying, most have expressed confidence that politicians will reach a compromise before the August 2 deadline designated by the Treasury. But that confidence seems to be dwindling as the deadline gets closer.

“Ten days ago, I would have said [Democrats and Republicans are engaging in] political posturing, but now the Republican leadership has backed into a situation where they cannot back down,” Barry Bosworth, a senior economist at the Brookings Institution, told FRANCE 24.

Political standoff

FOLLOW THE US DEBT IN REAL TIME

On Monday, the White House indicated that it would veto a plan presented by US Speaker of the House of Representatives John Boehner that would raise the debt ceiling in two steps. The plan, which Boehner has been trying to sell to his Republican colleagues, would raise the ceiling until early 2012 in exchange for $1.2 trillion in spending cuts over 10 years. Boehner's proposal then asks for $1.8 trillion more in spending cuts in order for the debt limit to be raised again. This proposal is expected to be debated by the House of Representatives on Thursday.

The Democratic plan, on the other hand, would increase the debt ceiling through 2012, in exchange for $2.7 trillion in spending cuts over the following 10 years.

“There are some substantive differences in that Democrats want to raise taxes and Republicans are mainly calling for a reduction in spending on social programs,” historian François Durpaire, who has written a book on Obama’s handling of the economic crisis, told FRANCE 24.

“There is also obviously a political dimension to this standoff, as the presidential election in the US is just over one year away,” Dupaire said. “The Republicans want a two-stage plan, so that the issue comes up again in the middle of the campaign. That way, they’d be able to portray Obama as a big spender who’s responsible for this crisis.”

As for the specifics of their dueling plans, it looks like neither Democrats nor Republicans will get their way. Neither plan explicitly includes the tax increases on the wealthy that Obama has been pushing for. And, as Bosworth of the Brookings Institution explained, “the focus of expenditure cuts [in both plans] is now largely ‘discretionary’ spending, which excludes Social Security and Medicare”, programs Republicans have been pushing to cut.

The worst-case scenario

Economists, politicians, and pundits alike have been sounding the alarm about what might happen if no compromise is reached. The new head of the IMF, Frenchwoman Christine Lagarde, warned on Tuesday that a US default would have “very, very, very serious” consequences for the global economy. Meanwhile, the president of the Federal Reserve, Ben Bernanke, said last week that a failure to find an agreement to lift the debt ceiling would result in a “major” crisis.

On Monday night, President Obama, in a televised address, called for Americans to contact their Congressional representatives to pressure them to reach a deal. “It is a dangerous game we’ve never played before, and we can’t afford to play it now,” he said. “Not when the jobs and livelihoods of so many families are at stake.”

Despite that warning, Bosworth said it is unlikely that the US would default, even if a compromise was not reached and the US government no longer had enough money at its disposal to pay its bills. In that case, the administration “would pay interest on the national debt”, likely allowing the US to avoid default. Still, Bosworth said, “there would be a suspension of other payments and it would be very disruptive”.

Another potential consequence of the US not finding a solution to the debt crisis would be a downgrading of its credit rating by credit rating agencies Moody’s and Standard & Poor’s. Both agencies have said in recent days that they were indeed anticipating downgrading the US from its AAA standard. But Bosworth said that such a development would be “not very significant”, since “the ratings agencies have little credibility”.

“There would be some increase in interest rates,” Bosworth speculated. “But the economic significance would be in the termination of any recovery, and growing threats to employment”.

Date created : 2011-07-27

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