30 Jul 2011

Default looms as Senate blocks debt plan

Efforts on Capitol Hill to find a deal to allow the US to raise its $14.3tr debt limit failed last night when the Democrat-led Senate rejected a Republican bill passed by the House of Representatives.

Under the bill, proposed by Speaker John Boehner, a $900bn increase in the country’s debt limit would be balanced by a similar amount in spending cuts.

The Republican-controlled House had approved the plan, but it was quickly rejected by the Democratic-led Senate. It sets the stage for a tense weekend in Washington.

Senate Democratic leader Harry Reid ceded some ground late on Friday when he revised his own deficit reduction proposal to incorporate parts of a “back-up plan” first proposed by Mitch McConnell, the Republican leader in the Senate.

The Reid plan could give President Obama the authority to raise the debt ceiling in three stages to cover US borrowing needs through the 2012 elections, when he is running for a second term.

However, Senator Reid told reporters: “They (Republicans) are refusing to negotiate with us, and all they do is talk.”

Sarah Smith asks: how would The West Wing solve the debt crisis?

Earlier on Friday, the US President expressed confidence that both parties could break the deadlock over the debt. “We’re in rough agreement about how much spending can be cut responsibly,” he said.

Congress has until 2 August to resolve the deadlock. If the $14.3tr debt ceiling is not raised by Tuesday, the United States will lose its ability to borrow and will start to run out of cash to pay its bills.

Even if a last-minute deal is struck, the country risks losing its AAA credit rating – which would push up the cost of borrowing while the country’s economy continues to struggle.

China, the United States’ largest foreign creditor, said on Friday via its state-run news agency that the US had been “kidnapped” by “dangerously irresponsible politics”.

That view was echoed by World Bank President Robert Zoellick, who said a debt default would be a “financial calamity” and that people were “playing with fire”.