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
WASHINGTON: The chaos at the heart of government in the US danced into the realm of the absurd on Tuesday morning when the Congressional Republicans who pulled on the fight, failed to agree on their next move.
Earlier optimism that Congress would eventually reach an agreement to fund the government was slowly giving way to despair, while Fitch ratings agency added to jitters by putting Washington's AAA rating on a downgrade warning.
The House and Senate have little room to fashion an agreement before Thursday, raising alarm bells that the US will default.
Economists have warned that such a scenario will have devastating effects globally and would lead to a worldwide recession worse than that caused by the 2008 financial crisis.
House Speaker John Boehner speaks to the media following a House Republican caucus meeting at the US Capitol. Photo: AFP
Fitch warned it would downgrade the US debt rating from its highest level, citing the possibility the Treasury could default on its obligations.
"The US authorities have not raised the federal debt ceiling in a timely manner," it said.
"Although Fitch continues to believe that the debt ceiling will be raised soon, the political brinkmanship and reduced financing flexibility could increase the risk of a US default."
Such a move by Fitch would bring its rating in line with Standard & Poor's, which downgraded the US in 2011 following a similar stand-off.
Failure by the House Republicans to agree either on tactics or strategy forced the suspension of a tentative Senate-driven deal by which the Democrat and Republican leaders had agreed to continue government funding and borrowing into the New Year.
Republican leaders in the Senate were in the process of selling that deal to their members when their lunchtime meeting was adjourned to allow more time for their House colleagues to come up with a position of their own.
With the core dispute being one among Republicans instead of the conventional Democrat versus Republican stand-off, it was becoming more difficult to identify the gap through which leadership negotiators on all sides – Republican versus Republican and Democrat versus Democrat – might find their way to common ground ahead of Thursday's deadline for Washington, theoretically at least, to default because it will have reached its debt ceiling.
Late on Monday there were signs that leaders of the two parties in the Senate had reached a tentative deal. But even as it was being finessed on Tuesday morning, it became clear that the House Republicans were unable to agree on a position – and that the leadership was incapable of directing or controlling them.
A closed-door meeting was held, at which they tried to hammer out new ways to keep their demand that the Affordable Care Act – "Obamacare", as they disparage the country's new healthcare regime – be pruned.
After two hours, their hapless leader, Speaker John Boehner, emerged to tell reporters: “[There were] no decisions about what exactly we will do. We're trying to find a way forward in a bipartisan way that would continue to provide fairness to the American people under Obamacare.”
But alluding to the chaos of the party room, he added: “There are a lot of opinions.”
Tuesday's events left Mr Boehner even more adrift than at any other time in the 15-day-old crisis. On Monday night, it looked as if he might at least be able to press-gang his House members into accepting the bipartisan deal emerging from the Senate. But with that deal now on hold, Mr Boehner seems to have been painted into a corner.
As some Republicans confronted the reality that President Barack Obama seems unlikely to fold in the face of their demands and that the Congressional Democrats are united, the former Republican presidential hopeful, Senator John McCain, warned: “It's very, very serious. Republicans have to understand we have lost this battle, as I predicted weeks ago - that we would not be able to win because we were demanding something that was not achievable.”
In an afternoon scramble, House Republican leaders emerged with what they presented as their new position – a deal to reopen government until mid-December and to allow government borrowing through till the end of the first week in February, coupled with a denial of Obamacare contributions to lawmakers, White House staff who buy health insurance on new insurance exchanges.
Mr Boehner was expected to seek a House vote as early as Tuesday evening. But there is no guarantee that such a vote would resolve the crisis. Alluding to one version of the Republican House plan, the Democrats' Senate leader Harry Reid told reporters: “It can't pass the Senate – and won't pass the Senate.”