The Democrat-controlled US Senate has blocked a Republican debt-ceiling bill, just two hours after it was narrowly passed in the House of Representatives.
– Default fears worsen as US Senate blocks debt-ceiling bill (Telegraph, July 30 2011):
Congress was earlier warned that it was “playing with fire” and President Barack Obama appealed for a compromise as the Tuesday deadline for a resolution of the debt crisis talks loomed ever closer.
The Senate is now instead debating a Democrat plan to avoid a US government default, a spectre that has created fears of a fresh world recession. The Treasury department says that the US will default on its financial obligations on Tuesday if agreement is not reached on raising the debt ceiling.
Late on Friday night the Republican-controlled House had passed a bill, which would have lifted the borrowing ceiling only temporarily, by just eight votes. Democrats had opposed it as unacceptable and “extremist” – while conservatives influenced by the Tea party argued that it did not go far enough.
John Boehner, the Republican Speaker of the House, gave an impassioned appeal to his colleagues in the House to approve his plan, slamming his fist on the podium several times.
“I stuck my neck out a mile to get an agreement with the president of the United States,” he said, referring to failed negotiations with Mr Obama earlier this month
“My colleagues, I can tell you I have worked with the president and the administration since the beginning of this year to avoid being in this spot,” he added. “A lot of people in this town can never say yes.”
With the vote out of the way after two days of high drama, negotiations immediately started on a compromise bill that would be started in the Senate by Democrats and then go back to the House.
It might then pick up enough votes across both parties to pass before Tuesday’s deadline to raise the so-called debt ceiling.
There is a however real danger that Congress will not meet the deadline set by the US Treasury, which could mean that the US fails to pay its creditors for the first time.
The government may also fail to fund state pensions, student loans, military salaries, contracts with businesses and a gamut of routine payments.
World leaders have warned of the dire consequences for the global economy of a US default.
There has been dismay at the dysfunction in Washington, with World Bank President Robert Zoellick saying the United States was “playing with fire”.
“Whatever the logic about the tactics, it’s a very dangerous environment,” he told a meeting of the Society for International Development.
“To be blunt, to have a debt default in the United States would not only be a financial calamity but should be an embarrassment for every American” he said.
America’s largest foreign creditor, China, has repeatedly urged Washington to protect its dollar investments and its state-run news agency said the US had been “kidnapped” by “dangerously irresponsible” politics.
Fears about the health of America’s economy multiplied after an official report showed weaker than expected growth in the second quarter, raising the risk of recession.
It was always assumed that after weeks of grandstanding in Washington a debt deal would be reached with a week or so to spare.
But even seasoned observers of political theatre on Capitol Hill have been dumbstruck by the failure to find a compromise so far.
Even if Washington paid its creditors, the spectacle of devastating political failure would probably unnerve markets and possibly lead to a lowering of its triple-A credit rating.
Mr Boehner has faced a major rebellion by members of the Tea Party wing of his caucus, who were elected vowing not increase taxes or spending.
They refused to support his first bill on Thursday night but on Friday night sufficient numbers supported a revised plan, which allowed raising the debt ceiling on a short-term basis but only if future Congresses were required by law to balance the budget.
Earlier in the day, the president and Democratic leaders in Congress said that if even if the Boehner plan was approved, they would oppose it.
“There is not going to be any agreement to a short term solution,” said Senator Harry Reid, leader of the Democratic majority in the Senate. “The stakes could not be higher, the security of our nation, literally, and every family is at stake here.”
Speaking earlier at the White House, Mr Obama warned that the country’s top credit rating was at risk after leading credit agencies said they were likely to issue a downgrade.
“If we don’t do that, if we don’t come to an agreement, we could lose our country’s triple-A credit rating, not because we didn’t have the capacity to pay our bills – we do – but because we didn’t have a triple-A political system to match our triple-A credit rating,” he said.
“There are a lot of crises in the world that we can’t always predict or avoid – hurricanes, earthquakes, tornadoes, terrorist attacks. This isn’t one of those crises. The power to solve this is in our hands,” he said.
Mr Obama and the Democrats warned that anti-tax and spending opponents of raising the debt limit would, by scuppering a deal, raise the financial burden on ordinary Americans. A downgraded credit rating would lead to higher interest rates, mortgages, car loans and student loans, they said.
The president called on Americans to intervene directly by calling, emailing or posting messages on Twitter to their congressmen.
Within minutes, telephone circuits in the House were overwhelmed by a high volume of external calls, resulting in busy signals or difficulty getting through on phone lines, congressional aides said.
Opponents of a deal have accused the administration of scare tactics and questioned if the consequences of failing to raise the debt ceiling.