Obama sets deadline for progress on US debt deal

President Barack Obama on Thursday gave congressional leaders a weekend deadline to find a way to raise the US debt ceiling, but a divide over spending and taxes remained a huge hurdle to a deficit-cutting deal.

Updated: Jul 15, 2011, 09:24 AM IST

Washington: President Barack Obama on Thursday gave congressional leaders a weekend deadline to find a way to raise the US debt ceiling, but a divide over spending and taxes remained a huge hurdle to a deficit-cutting deal.

Credit ratings agency Standard & Poor's added pressure to the debate, warning the risk that the United States would lose its top-notch credit rating in the next three months had risen considerably, even if lawmakers reach an agreement to raise the ceiling on borrowing later this month.

S&P's warning came after China, the United States' biggest foreign creditor with more than USD 1 trillion in Treasury debt, pressed Washington to adopt responsible policies to protect investor interests.

Against that backdrop, Obama and lawmakers held their fifth set of talks this week without significant progress.

Republicans continued to reject tax hikes, even when Obama offered to pair them with the extension of a payroll tax cut to boost the struggling economy.

Time is running short for a deal.

The US Treasury has warned that it will run out of money to pay the country's bills after Aug. 2 if the USD 14.3 trillion borrowing limit is not raised. Failure to seal a deal by then could cause turmoil in global financial markets and plunge the United States into another recession.

John Chambers, the chairman of S&P's sovereign debt committee, told Reuters in an interview that "this is the time" for the White House and Republicans to reach a credible budget agreement to tackle the country's long-term debt problems.

"If you get a small agreement, that will lead to a downgrade," Chambers said.

Republicans, who are seeking USD 2.4 trillion in cuts in return for supporting a rise in the debt ceiling, pressed Obama to reduce spending in a "meaningful way," one aide said.

Obama, who sees the possibility of a USD 2 trillion package including some tax hikes, pressed for a grand package.

"I want to do the largest deal possible," he said, according to a Democratic official familiar with the talks. "It's decision time. We need concrete plans to move this forward."

Friday huddle

Congressional leaders planned to huddle with their members on Friday morning to see what kind of deal was possible.

One alternative remained on the table: Senate Republican leader Mitch McConnell's plan that would give Obama the authority to raise the debt ceiling on his own. The White House has said that is not its preferred option.

No meeting was planned for Friday, but Obama said he would call the negotiators together over the weekend if he did not hear back from lawmakers with an action plan before then.

Obama will hold a press conference at 11:00 a.m. EDT (1500 GMT).

Obama said a roughly USD 2 trillion deal "would be possible if all sides were willing to give a little," the official said.

House of Representatives Speaker John Boehner, the top Republican in Congress, said the White House had not offered enough to address the debt problem after Treasury Secretary Timothy Geithner said financial markets wanted the ceiling to be raised and a deficit-cutting deal to be agreed.

"The speaker used that warning to reiterate his concern that nothing the administration is offering to this point will resolve our debt problem," said a Republican aide. "He continued to press the White House to get serious about reducing spending in a meaningful way."

Markets react

Markets reacted skittishly as an agreement remained elusive, and divisions within the Republican Party seemed to increase the difficulty of striking a deal.

"The eyes of the country are on us, the eyes of the world are on us," Geithner told reporters after meeting with Democratic senators. "We are running out of time."

Business leaders have added their powerful voice, calling on Congress to put aside politics and reach an agreement to allow the debt ceiling to be raised.

"It is an imperative that the debt ceiling be fixed and it's an imperative that the United States shows fiscal discipline," said JPMorgan Chase chief executive Jamie Dimon.

"No one, no one can tell me with certainty that a default wouldn't cause catastrophe and therefore it's irresponsible to take that chance," he told reporters.

Failure to raise the debt ceiling could spook investors, causing US interest rates to surge, stock prices to plummet, push the United States back into recession and cause turmoil on global markets,

Federal Reserve Chairman Ben Bernanke said the spiraling fallout of a potential default -- higher interest rates and thus a bigger deficit -- would be a "self-inflicted wound."

In testimony on Capitol Hill, the US central bank chief also inserted a word of caution that overzealous spending cuts in the very short term could derail the fragile economy.

Bureau Report