GOP Races to Revive Debt Plan

Friday, 29 Jul 2011 06:30 AM

 

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Republican leaders will scramble to rescue their budget deficit-cutting plan on Friday after conservatives mounted a rebellion that heaped uncertainty on efforts to avert a catastrophic debt default.

House of Representatives Speaker John Boehner's failure to round up enough support for his plan on Thursday exposed a rift in the Republican Party that is hampering efforts to reach a compromise to raise the U.S. debt ceiling before a Tuesday deadline.

President Barack Obama says that unless Democrats and Republicans strike a deal, the government will start being unable to pay all its bills on August 2, a once unthinkable prospect that is increasingly unnerving investors.

With only four full days left, the Treasury could unveil as early as Friday an emergency plan explaining how the government would function and pay its obligations if Congress does not agree to raise its borrowing limit from $14.3 trillion.

Despite warnings of dire economic consequences, lawmakers appear as far apart as ever as conservative Republicans demand an end to what they say is out-of-control government spending and Democrats seek to protect spending on social programs.

In a sign of growing international alarm over the U.S. impasse, China's state-run news agency sharply criticized U.S. politicians, saying the world's largest economy has been "kidnapped" by "dangerously irresponsible" politics.

As the largest foreign creditor to the United States, Beijing has repeatedly urged Washington to protect its dollar investments, which are estimated to account for about 70 percent of its $3.2 trillion in foreign exchange reserves.

Boehner's plan, which would cut spending by about $900 billion and raise the debt ceiling for a few months, is sure to be rejected by the Democratic-controlled Senate but could factor into an eventual compromise.

His inability to win quick passage in the Republican-run House could weaken his position at the bargaining table.

Top Senate Democrat Harry Reid wants to raise the debt ceiling by enough to kick the crisis beyond the November 2012 presidential election.

Reid indicated late on Thursday that he may advance his own bill, which cuts spending by $2.2 trillion over 10 years, in the Senate rather than use Boehner's proposal as the basis for a compromise.

REPUBLICAN MEETING

House Republicans were due to meet at 10 a.m. (1400 GMT) on Friday to discuss a way forward after last-minute arm-twisting by Boehner failed to overcome opposition within his party and forced him to abandon a planned vote on Thursday night.

The setback raised doubt over his ability to deliver enough votes in any compromise deal with the Senate.

Lawmakers continued to throw blame at each other, with Democrats accusing Republicans aligned with the fiscally conservative Tea Party movement of holding Americans hostage to their vision of small government.

"Republicans have taken us to the brink of economic chaos. The delay must end now so we can focus on the American people's top priority: creating jobs and growing the economy," House Democratic Leader Nancy Pelosi said in a statement.

Tea Party lawmakers say they are justified in taking a strong stand after being elected last year on a promise to slash spending.

Fears of an unprecedented default by the world's biggest economy and the more likely scenario of America losing its top-notch credit rating are gnawing at markets, hitting stocks, undermining the dollar and fueling a move to safe havens.

Further market turbulence appeared likely on Friday. After the announcement that the House would not vote on Thursday, the dollar fell to a four-month low of 77.50 against the Japanese yen. U.S. stock futures were off 0.6 percent, pointing to a weaker start on Wall Street.

Veterans of U.S. legislative battles voiced confidence that a deal will be reached as Congress works through the weekend and feels the heat from jittery financial markets and ordinary Americans frustrated by the Washington gridlock.

The main sticking point between Republican and Democratic leaders is that Boehner's two-step plan would only extend the government's borrowing for a few months. Obama wants the debt ceiling raised beyond the November 2012 elections.

Without a deal, Obama could be forced to consider taking emergency steps to ward off a default even though the White House has said Congress must come up with a solution.

Among his options are invoking an obscure constitutional amendment to raise unilaterally the debt ceiling or for the Treasury to prioritize payments, choosing between paying bond holders or Social Security pension recipients, for example.

"I think they should be exploring all their legal options," Democratic Representative Chris Van Hollen said on Thursday night.

Even if the administration were to implement some of the options, the debt crisis could still trigger turmoil in financial markets.

© 2014 Thomson/Reuters. All rights reserved.

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