Debt default - what next?
Economics correspondent Peter Martin discusses what might follow a US debt default and whether it is even possible to prepare for the consequences.PT4M13S http://www.canberratimes.com.au/action/externalEmbeddedPlayer?id=d-2vm2y 620 349 October 16, 2013
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Democratic and Republican leaders in the US Senate could announce a deal late Tuesday (Washington time) to extend the government's borrowing authority until February 7 and quickly re-open federal agencies that have been closed since October 1, a Senate aide said.
The aide described a deal in line with provisions that were being negotiated in the Senate before a failed House of Representatives proposal suspended those talks. The provisions include a temporary government spending bill running through January 15.
Still at a stalemate: John Boehner speaks to reporters in Washington. Photo: AFP
The aide said discussions were also underway in which the Republican-controlled House, if it cooperated, could help speed up passage of any deal before a Thursday deadline when the Treasury Department says it will bump up against its borrowing limit.
"There are a lot of opinions about what direction to go. There have been no decisions about exactly what we will do," House Speaker John Boehner said after the meeting.
"We're going to continue to work with our members on both sides of the aisle to try to make sure that there is no issue of default, and to get our government reopened," he said.
The disarray among House Republicans raised questions about what the House will be able to pass. Conservative House members, driven by support from Tea Party small-government activists, have demanded changes to Barack Obama's signature healthcare law as part of any budget deal.
Those demands sparked the shutdown that began with the dawn of the new fiscal year on October 1, temporarily throwing hundreds of thousands of government employees out of work.
If Congress fails to reach a deal by Thursday, checks would likely go out on time for a short while for everyone from bondholders to workers who are owed unemployment benefits. But analysts warn that a default on government obligations could quickly follow, potentially causing the US financial sector to freeze up and threatening the global economy.
Senate Democratic Leader Harry Reid and Republican Leader Mitch McConnell halted talks while House Republicans tried to sort out what they would support, Richard Durbin of Illinois, the No. 2 Senate Democrat, said.
"We were on track and Boehner stepped in," he said. "McConnell is waiting on Boehner and Boehner is waiting on his caucus."
After Senator Durbin's comments, markets got increasingly nervous about the prospects of a last-minute deal.
The Dow Jones Industrial Average was down 0.55 per cent in late afternoon trade. The Standard & Poor's 500 Index was trading down 0.4 per cent.
The House Republican proposal initially floated on Tuesday would have funded the government through January 15, and raised the $16.7 trillion ($17.5 trillion) debt ceiling by enough to cover the nation's borrowing needs through February 7, similar to the Senate plan, aides said.
But unlike the Senate, it would include a two-year suspension of the medical device tax included in Obama's healthcare law and a requirement that members of Congress and the administration be covered under the law.
The House version also would not allow the US Treasury to renew its extraordinary cash management measures to stretch borrowing capacity for months, which had tentatively been allowed under the Senate plan.
The White House and Senate Democrats quickly rejected the House draft plan as not workable.
'PARTISAN ATTEMPT' TO APPEASE TEA PARTY
Senator Reid said the Republican plan was a "partisan attempt to appease a small group of Tea Party Republicans who forced the government to shut down in the first place".
"I am very disappointed with John Boehner who once again tried to preserve his role at the expense of the country," Senator Reid said.
But Republican Senator John McCain of Arizona, who has blamed House Republicans for the shutdown, blasted the White House and Senate Democrats for promptly rejecting Mr Boehner's latest plan.
"I urge my Democratic colleagues, let's sit down and work this out," Senator McCain declared, his voice rising. "Let's get this resolved."
"To categorically reject what the House of Representatives and the Speaker are doing - and I think he is pretty courageous in what he's doing - in my view is not serving the American people."
President Obama was due to meet with House Democratic leaders this morning to discuss their options.
Before the House action, Senator Reid had said he was optimistic about reaching a final deal this week.
"There are productive negotiations going on with the Republican leader. I'm confident that we'll be able to reach a comprehensive agreement this week in time to avert a catastrophic default on the nation's bills," he said on the Senate floor.
Ratings firms have not yet revealed any plans to downgrade US government debt.
Marie Cavanaugh, S&P's managing director for sovereign ratings, said on Tuesday during a panel discussion hosted by Democratic Representative Maxine Waters, "Standard & Poor's thinks that the current impasse over the debt ceiling and the continuing resolution is unlikely to change our rating, which is AA+ with a stable outlook".
Numerous polls show Republicans have taken a hit in opinion polls since the stand-off began and the government shut down on October 1. A Washington Post/ABC News poll released on Monday found that 74 per cent of Americans disapprove of the way congressional Republicans have handled the stand-off, compared with a 53 per cent disapproval rating for Mr Obama.
Another survey released by Gallup on Tuesday showed American confidence in the US economy fell another five points last week as the government shutdown continued.
The crisis is the latest in a series of budget battles in recent years that have hurt consumer confidence and weighed on the economy. A Monday estimate by the Peter G. Peterson Foundation, a think tank, said the uncertainty from the frequent showdowns had boosted the unemployment rate by 0.6 of a percentage point, or the equivalent of 900,000 jobs since late 2009.