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The US has one week to avoid default

The 2 August deadline for reaching an agreement on raising the US debt ceiling is drawing closer without any sign of a deal.

Image: AP Photo/J. Scott Applewhite

BICKERING IN PUBLIC yet bargaining in private, US congressional leaders are struggling for a compromise debt limit deal that avoids a market-rattling default in little over a week while cutting trillions in spending.

House Speaker John Boehner planned to meet with his chamber’s Republicans today to discuss the party’s clash with President Barack Obama over extending the government’s borrowing authority, which lapses on 2 August. There were widespread expectations on Capitol Hill that Boehner would unveil debt ceiling legislation by that session, if not earlier.

After meeting at the White House on Sunday with Obama and House Democratic Leader Nancy Pelosi, Senate Majority Leader Harry Reid said bipartisan talks on a solution had collapsed because Republicans were insisting on only extending the debt limit for a short period. He said he was crafting a $2.7 trillion package of spending cuts that would also push the government’s borrowing authority through next year, a timeline that Obama and top Democrats are demanding.

Reid called Boehner’s forthcoming proposal “a nonstarter in the Senate and with the president.” In a written statement, he said that it “would not provide the certainty the markets are looking for and risks many of the same dire economic consequences that would be triggered by default itself.”

Paying the bills

As yet another day passed with the two parties unable to shake hands, the drama seemed certain to play out in nail-biting fashion. If the government’s authority to borrow money isn’t renewed by 2 August — its current $14.3 trillion limit has been reached — it won’t have cash to pay all its bills. The administration and many others say that scenario would risk a first-ever federal default, with higher interest rates and other devastating effects cascading through the entire economy.

Both Boehner and Reid were hoping that by presenting their competing plans, they would demonstrate a seriousness that could prevent the world’s financial markets from panicking and punishing the US by demanding higher interest rates for the huge amounts of cash it must constantly borrow. Speaking to the US Chamber of Commerce in Hong Kong early today, Secretary of State Hillary Rodham Clinton tried to reassure financial markets that America’s economy is sound and a deal on the debt limit would be reached.

Nonetheless, Asian markets fell today.

In a conference call with his colleagues on Sunday, Boehner provided no details of what he was considering, other than saying it would embrace the principles of the so-called cut, cap and balance bill. That measure, which the House approved last week and the Democratic-led Senate defeated, would have cut spending deeply and extended the debt limit into 2013 — but only on condition that Congress approve a constitutional amendment requiring a balanced federal budget.

“It’s gonna require some of you to make some sacrifices,” Boehner said of his strategy during the 45-minute call, according to excerpts the speaker’s office distributed to Republican offices. “If we stand together as a team, our leverage is maximised, and they have to deal with us. If we’re divided, our leverage gets minimised.”

Officials said Boehner’s legislation would likely add about $1 trillion to the debt ceiling, enough to last about six months, accompanied by a slightly greater amount of spending cuts and the prospect of more savings later — in effect a dare to the Senate and Obama to reject it. Those elements were part of a plan that congressional and White House negotiators discussed over the weekend but never completed because of clashes over how the future, deeper spending cuts would take effect.

“I would prefer to have a bipartisan approach to solve this problem,” Boehner said on Fox News Sunday. “If that is not possible, I and my Republican colleagues in the House are prepared to move on our own.”

Raising the debt limit

Obama, backed by Democratic congressional leaders, has demanded a debt-limit extension that would last through next year. He has argued that to let the cap on federal borrowing lapse anew would jeopardise the economy by thrusting the issue into the red-hot campaign season preceding the 2012 presidential and congressional elections.

Top congressional aides labored to try producing a compromise Sunday that the House and Senate could quickly approve, and Obama and Boehner spoke by phone, aides said. Though Boehner and Reid both now back plans without immediate increases in federal revenue, no agreements were announced.

Administration officials took to the airwaves on Sunday to make their case, with White House chief of staff William Daley saying Obama would veto a bill that didn’t extend the borrowing limit into 2013.

“The president believes that we must get this uncertainty in order, to help the American economy and help the American people,” Daley said on NBC’s “Meet the Press.”

Treasury Secretary Timothy Geithner also underscored administration opposition to a short-term extension of the debt ceiling. But reaching out to investors, he said on CNN’s “State of the Union” that a US default was unthinkable, saying, “We never do that. It’s not going to happen.”

- AP

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