US PRESIDENT Barack Obama and top Republicans faced growing pressure at home and abroad yesterday to stop deficit talks from spiralling out of control and sending shockwaves through the global financial system.
Markets reacted skittishly after the fourth straight day of talks between Mr Obama and congressional leaders hit a new low on Wednesday, while divisions within the Republican party seemed to increase the difficulty of striking a deal to extend the nation’s borrowing authority and avoid a default after August 2nd.
Mr Obama clashed with Republican law-makers during an acrimonious two-hour White House session that produced no progress toward a deal.
A leading Republican said that Mr Obama walked out of the meeting.
China, the United States’ biggest foreign creditor with more than $1 trillion in treasury debt, urged Washington to adopt responsible policies to protect investor interests.
Beijing’s comments followed a warning by Moody’s Investors Service that it might strip the the gold-plated US credit rating if the $14.3 trillion credit limit was not raised.
Standard & Poor’s has also privately told US lawmakers and top business groups that it might cut the rating if the government failed to make any of its expected payments, including social security payments, even if it makes all of its debt payments, a source in the meeting said.
The US treasury has warned that it will run out of money after August 2nd to pay all of the country’s bills if a deal is not reached to raise the debt ceiling, which caps the amount of money the US can borrow.
The prospect of a cut in the United States’ AAA credit rating hit stocks prices globally and weakened the dollar yesterday.
US bond prices fell in New York and yields rose, in part due to the Moody’s warning.
“It increases pressure on the politicians, and therefore increases the probability that they will do what needs to be done,” said Ward McCarthy of Jefferies & Co in New York.
Business leaders have also thrown in 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 can tell me with certainty that a default wouldn’t cause catastrophe and therefore it’s irresponsible to take that chance,” he told reporters.
Despite the apocalyptic warnings from economists and US treasury officials, some conservative Republicans refuse to believe a default is imminent.
However, that view is not shared by many of the party’s top leaders, who accept that if the debt ceiling is not raised in time there could be a default with drastic repercussions.
