White House mulls other debt options

The
White House suggested it was beginning to look for novel ways to
protect the US from a default on its debt in the event that a deal could
not be reached with congressional Republicans to shrink US deficits. A
second rating agency also warned that the country’s bonds could lose
their top rating.

Standard & Poor’s followed Moody’s in putting its triple A rating
on US government debt under review for possible downgrade, indicating
“there is at least a one-in-two likelihood that we could lower the
long-term rating on the US within the next 90 days” due to the fiscal
standoff.

At a meeting on Thursday evening, congressional leaders agreed to discuss their options with rank-and-file legislators over the next 24 to 36 hours and were due to report back to Barack Obama, the US president “about where they think they can go”, according to a Democratic official. The lawmakers will not meet at the White House on Friday, marking the first break from the talks in five days.

The meeting on Thursday was described as “composed and polite” by a Republican aide close to the talks, with Mr Obama saying that he and his staff would be “on call” in coming days.

“It’s decision time. We need concrete plans to move this forward,” Mr Obama said at the meeting. “I want to do the largest deal possible.”

The president indicated that a “real” deficit reduction package would help stabilise the markets. His team also discussed an extension of the payroll tax cut, which was introduced last year as a mechanism to stimulate economy.

They also discussed a possible extension of unemployment insurance. A Republican close to the talks said the administration presented a budget enforcement mechanism containing automatic tax increases.

The summit hit a sombre note when Tim Geithner, the Treasury secretary, warned of concerns in world financial markets about the outcome of the negotiations. At that point, John Boehner, the Republican speaker of the House, pressed the White House to “get serious” about reducing spending in a meaningful way, the Republican aide said. Mr Obama is due to hold a press conference on Friday.

Earlier Thursday, Jay Carney, the White House press secretary, said Mr Obama was seeking to determine soon whether enough progress was being made towards a large-scale deficit reduction plan. If no such agreement was in sight, “then we have to begin looking at making sure that we fulfil our obligation to uphold the credit rating,” Mr Carney said.

In announcing its review, S&P said, “We believe there is an increasing risk of a substantial policy stalemate enduring beyond any near-term agreement to raise the debt ceiling.” It warned that it could declare a “selective default” if any scheduled interest payments were delayed or missed.

There was more evidence of the difficulty of the talks on Thursday before the meeting, as Republicans and Democratic lawmakers accused each other of negotiating in bad faith a deal to avoid a possibly devastating default. Leaders of both parties seemed intent on fanning the flames of discord instead of damping them down one day after Wednesday’s White House meeting, which ended with an apparently exasperated Barack Obama walking out following a clash with Eric Cantor, the number two Republican in the House. A Democratic official said that Mr Cantor did not utter a word at Thursday’s meeting, in which the parties discussed healthcare savings and ways to raise revenue.

Mitch McConnell, the Senate Republican leader, who this week proposed that Congress use a complicated legislative manoeuvre to end the gridlock over a deficit reduction plan, said: “Republicans will not be reduced to being the tax collectors for the Obama economy … We won’t be seduced into calling a bad deal a good one.”

Democratic leaders in Congress have ruled out any budget deal that would cut hundreds of billions of dollars in spending on popular programmes such as Medicare, the healthcare programme for the elderly, if they are not coupled with tax increases on wealthy Americans and corporations. But Republicans staunchly object to any increase in revenue as part of the deal. Mr Carney said all the parties could agree on $1,500bn in spending cuts over ten years – mainly from the discretionary portion of the budget – and at least $200bn in additional savings were within reach.

China, the largest foreign holder of US debt, weighed into the fray on Thursday. “We hope the US government adopts responsible policies to protect the interests of investors,” said Hong Lei, a Chinese Foreign Ministry spokesman at a regular briefing, using a long-standing formulation to express Beijing’s concern about its US debt holdings.

A new poll by Quinnipiac University showed that opinion seemed to favour Mr Obama amid the frenzy in Washington. Although 56 per cent of voters disapprove of Mr Obama’s handling of the economy, he is more trusted than congressional Republicans – 45 per cent against 38 per cent – to handle the economy.

The poll showed that 48 per cent of voters will blame Republicans for a failure to increase the debt limit and that a strong 67 per cent majority believe that the debt ceiling should include tax increases on the wealthy and corporations, not just spending cuts.