The United States edged closer on Tuesday to a devastating default as Republicans and Democrats were deadlocked over competing plans to raise the debt ceiling, one week before a deadline to act.
President Barack Obama, in a televised address aimed at rallying public support for a package proposed by Democrats, warned that failure to increase the U.S. borrowing limit would severely hurt the nation. “For the first time in history, our country’s triple-A credit rating would be downgraded, leaving investors around the world to wonder whether the United States is still a good bet,” he said in remarks in the East Room late on Monday.
Republican and Democratic lawmakers, despite weeks of intense talks, are far apart on a deal to reduce the budget deficit, which would clear the way for Congress to lift the $14.3 trillion borrowing limit by an Aug. 2 deadline, when the country runs out of cash to pays its bills. Markets have been rattled by the descent of negotiations into an acrimonious stalemate, with both sides offering competing plans that are unlikely to win bipartisan support. “Every day that goes by without a deal will see investors become a bit more defensive,” said Omer Esiner, chief market analyst at Commonwealth Foreign Exchange in Washington. Obama warned a default would inflict a tax hike on all Americans by pushing up borrowing costs on things like credit card loans and mortgages, but he sought to assure markets a deal could be reached. “I have told leaders of both parties that they must come up with a fair compromise in the next few days that can pass both houses of Congress – a compromise I can sign. And I am confident we can reach this compromise,” he said. The dollar fell across the board, hitting a record low against the safe-haven Swiss franc , as Obama’s comments indicated a swift breakthrough in the debt talks was unlikely.
Gold , seen as another safe-haven from the American and European debt woes, rose to a record high on Monday and hovered near that level on Tuesday. However, financial markets are not showing any sign of panic. Rating agency S&P warns it could downgrade the United States unless lawmakers agree on steps to reduce the deficit by $4 trillion over 10 years. A credit rating cut would be felt around the world. Investors will likely demand a higher return for holding U.S. government debt, a benchmark for almost all other financial markets, forcing up interest rates and sapping asset prices. Republicans and Democrats both insist they will not allow the United States to default and many investors expect the two sides to come to an agreement as well.
