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ARepublican proposal to cut the US deficit faced delay and stiff opposition today, raising the risk of a debt default and a ratings downgrade as the clock ticks toward adeadline less than a week away. Deeply divided Republican and Democratic leaders are scrambling to find common ground before August 2, when the government is expected to hit its $14.3 trillion borrowing limit that could trigger a default and roil world markets. Even if that fate is avoided, abudget plan that flinches from hefty cuts in the deficit could result in a downgrade of America’s top-notch credit rating, raising borrowing costs and dealing asevere blow to the country’s weak economic recovery.
The prospect of a quick resolution suffered another setback when a vote on a deficit reduction plan offered by House of Representatives Speaker John Boehner, the top Republican in Congress, was pushed back to Thursday from Wednesday amid opposition by fellow Republicans as well as Democrats. Republicans control the House and President Barack Obama’s Democrats control the Senate.
A competing plan crafted by Senate Majority Leader Harry Reid, a Democrat, also faced a setback on Wednesday when the non-partisan Congressional Budget Office said the proposal would cut $2.2 trillion from deficits, about $500 billion less than Democrats had claimed. Boehner rushed to rework his proposal after a Congressional Budget Office analysis on Tuesday found it would cut spending by $350 billion less than the $1.2 trillion over 10 years he had claimed.
Lawmakers need to carve out a deficit reduction plan to clear the way for Congress to raise the borrowing limit. But complications surrounding the rival proposals could mean efforts to forge a compromise will go right down to the wire. In an interview on MSNBC, Representative Steny Hoyer, the number two House Democrat, promoted Reid’s proposal as a solution to the deadlock, saying it reflects what Boehner wants — “no new revenues, no new taxes, cuts equal to the extension of the debt limit.” But Republicans have deep misgivings about it. The gridlock dragged global stocks down on Wednesday, particularly in Europe, and major US stock exchanges opened lower by at least one per cent in early trading.
Worried investors shifted funds into traditional safe havens gold and the Swiss franc, which both rose to record highs in dollar terms. The cost of insuring against aUS debt default in the next year increased to a record high. Still, there have been no signs of panic in markets because most investors expect a deal to be struck by the deadline.