Wednesday 18 January 2017

US governors turn screw on Congress to fix debt crisis

Democrats and Republicans must ink multitrillion deal to avoid default

Richard Blackden in New York

Published 18/07/2011 | 05:00

America's states have joined the calls for politicians in Washington to agree a multi-trillion debt deal as a matter of strict urgency as financial markets watch the impasse with growing concern.

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The National Governors' Association, which represents the country's 50 states, drafted an urgent letter over the weekend urging US President Barack Obama and the Republicans and Democrats in Congress to reach an agreement to lift the $14.3 trillion (€10.1trn) debt ceiling.

"We may be able to provide some welcome relief to the debilitating partisanship that is threatening to drive our country into default for no good reason," said Martin O'Malley, the governor of Maryland.

Mr Obama wants lawmakers to approve a giant package that will not only prevent a default by raising the government's borrowing limit, but also slash trillions of dollars from the huge deficit. He challenged lawmakers "to do something big".

Investors will welcome any pressure to break a deadlock on talks that are poised to take centre stage in financial markets this week.

Although the US treasury has set a deadline of August 2 to get a deal done, observers say that concrete progress will be required in the next five days to ensure there is time to vote an agreement through Congress.

Bond investors have so far remained relatively sanguine, believing that Congress would not risk failure and the likely default that would follow.

Ben Bernanke, chairman of the Federal Reserve, has repeatedly warned that a default on the country's debt payments -- even for a matter of days -- would be a catastrophe.

Priya Misra, an analyst at Bank of America Merrill Lynch, said: "Given the upcoming deadline, the likelihood that the debate goes down to the wire and even beyond August 2 is increasing daily."

Congress and the White House find themselves in the odd position of having to reach a deal on cutting America's deficit as a condition of raising its legal borrowing requirement, or debt ceiling as it is known.

Mr Obama and the Democrats are insisting that tax increases on the wealthy must be part of any deal, while Republicans argue it should be executed through spending cuts.

The anxiety over Europe's debt crisis has also deflected attention from talks that have made little progress in the past month.

Investors

Chris Low, an economist at FTN Financial, said that, given the scale of Europe's problems, US government bonds could still remain a safe haven for investors even if the government were to default.

However, some analysts have warned that a default could set off a second financial crisis.

Last night Republican Senator Tom Coburn said he would unveil a plan today that would cut $9trn (€6.4trn) from the federal budget over the next 10 years in an effort to curb spending and avoid a default.

While he said he didn't expect his plan to pass Congress, it would offer a wide range of spending cuts and revenue increases that could be used as the basis for bipartisan negotiations on a budget compromise. (©Daily Telegraph, London)

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