WASHINGTON: A day of political disarray on Tuesday thrust the United States to within hours of a debt default deadline, sparking fears of deep damage to a fragile US recovery and the global economy.
Just 29 hours before the US government begins to run short of money to pay its bills, there was no clear way out of a stalemate that has called the dollar’s status as the world’s reserve currency into question.
If Congress fails to raise US borrowing authority before midnight on Wednesday (4:00 a.m. on Thursday) the US Treasury would begin to run out of money to meet all US obligations and slip towards a historic debt default.
In the face of the deadline, the US political system, divided between President Barack Obama’s Democrats and Republicans who run the House of Representatives, has effectively ground to a halt.
Republican leaders repeatedly tried and failed Tuesday to appease the party’s conservative Tea Party faction with bills that would raise the debt ceiling and reopen the government but which had no chance of becoming law because they targeted Obama’s signature health care law.
Major world powers meanwhile looked on in dismay at the brinkmanship and political recriminations in Washington, fearing reverberations that could wreak havoc in their own sometimes weakened economies.
“We’re far from a deal at this point,” White House spokesman Jay Carney admitted on Tuesday.
Amid rising anxiety on the markets, the financial rating agency Fitch put the United States on warning for a downgrade from its top grade AAA spot.
Despite the deepening impasse, Obama said he still expected the issue
would be resolved in the end.
“My expectation is that this gets solved, but we don’t have a lot of time,” he told an ABC television affiliate in New York.
“What I’m suggesting to the congressional caucus is to avoid any posturing . . . do what’s right, open the government and make sure we pay our bills.”
Overnight hopes for an agreement between Senate Republicans and Democrats on raising US borrowing faded when conservative Republicans in the House seized back the initiative after daybreak.
The party made several new attempts to constrain Obamacare—defying White House demands for a bill lifting the debt ceiling without conditions.
The latest Republican measure would have raised borrowing authority until February 7 and reopen the government until December 15.
In turn, the bill would demand an end to health care subsidies for members of Congress, aides and White House and cabinet officials and stripped the Treasury’s power to take special measures to manage US debt obligations.
But Republican leaders pulled the measure late Tuesday after failing to secure enough Republican votes.
“There will be no action, no votes and the rules committee will not be in tonight,” Republican lawmaker Pete Sessions told reporters.
Senate talks, which had been on hold all day pending developments in the House, were quickly resumed on Tuesday evening.
Leadership aides on both sides said they were “optimistic” that an agreement was in reach.
Earlier, Senate Democratic leader Harry Reid furiously accused Republican House Speaker John Boehner of seeking to save his own political skin at the expense of the United States.
“Let’s be clear: the House legislation will not pass the Senate,” Reid said. “I am very disappointed with John Boehner, who would once again try to preserve his role at the expense of the country.”
Boehner was left once again with the unenviable choice that has come to define his speakership in Washington’s divided government.
Does he stick with the Tea Party faction of his party, and possibly save his job but risk culpability in sending the US economy into a first default of modern times?
Or does he try to pass a compromise plan acceptable to Senate Democrats and Obama, with the help of minority Democratic votes — a scenario that could fritter away his party power base and possibly cost him his job?
Republican Senator John McCain, who has been critical of his own party’s conduct in seeking to use the debt limit as leverage, turned fire on the White House and Democrats, calling on them to negotiate an exit strategy with Boehner.
“It’s piling on and it’s not right,” McCain said.
China and Japan, which between them hold $2.4 trillion in US Treasuries, are already alarmed at the implications of the crisis.
Japan’s Finance Minister Taro Aso said many US politicians “don’t seem to understand well the magnitude of the international impact this problem could have”.
And China’s Vice Finance Minister Zhu Guangyao, in Beijing, said: “We demand that the US side, as the issuing country of the major reserve currency . . . should undertake its due responsibility.”
The State Department, meanwhile, warned that dysfunction in Washington undermined America’s image abroad.
Congress needs to raise the debt limit by October 17 to avoid disruptions, but missing the deadline by a few days would probably be manageable,” said Jan Hatzius, chief economist at Goldman Sachs.
On Friday, the last day it reported, the Treasury only had an operating cash balance of $34.9 billion, less than half of what it started the month with and against daily expenditures that can sometimes surge to $60 billion.
Normally it can borrow to cover shortfalls and match the demand of a chronic fiscal deficit.
But Treasury says that from Thursday it will have no more power to borrow given the $16.7 trillion ceiling. As its bills accumulate faster than tax receipts, it will at one point be forced to default on obligations, including potentially the country’s debt.
Analysts say that next week’s payments schedule at the Treasury is relatively small, so that they should be able to manage. The first challenge, according to the Bipartisan Policy Center, a Washington think tank, is the need to issue $12 billion in checks for social security benefits on October 23.
That, and the Treasury apparently deciding not to roll over about $13 billion in debt on Thursday, should leave it with a cash balance of only $10 billion at the end of next week, according to Hatzius.
At the end of the month, however, the Treasury faces much larger payouts, for interest on the debt, social security, government salaries, and other benefits—more than $60 billion all told on October 31 and November 1.
“Given the volatility in the Treasury’s daily cash flows, as the Treasury’s cash balance dwindles the risk of a failure to make scheduled payments increases,” said Hatzius.