IMF warns on US debt, markets slide

US President Barack Obama (R) and US Speaker of the House John Boehner during a meeting in the Cabinet Room © AFP/File Jewel Samad

AFP

WASHINGTON (AFP)  – Pressure rose on President Barack Obama and top lawmakers Monday to avert a ruinous US debt default just days away, as stocks slipped and the IMF warned of a “severe shock” to the world economy.

Obama cancelled a pair of political fundraisers as Democrats and Republicans huddled separately in congress in a quest for a compromise without which the world’s richest nation will run out of cash to pay its bills August 2.

The International Monetary Fund pressed polarized US politicians to raise the US debt ceiling “expeditiously to avoid a severe shock to the US economy and world financial markets” with the deadline now looming large.

The IMF warned that US debt would total 99 percent of the size of the US economy this year and 103.0 percent in 2012, and urged a blend of spending cuts, tax revenue increases, and reductions in cherished social safety net programs.

The warning from the Washington-based institution, viewed skeptically by many in the US Congress, came as US stocks sank and gold soared in a face of the angry political stalemate on the debt.

Dow blue chips fell 0.5 percent, and the S&P 500 lost 0.4 percent, while gold and the Swiss franc — refuges when the dollar and euro look shaky — both jumped, while the US currency slipped. Asian stocks also slumped.

Market worries came despite US Secretary of State Hillary Clinton’s promise as she neared the end of an Asia trip that the White House, its Democratic allies, and Republican foes would reach an 11th-hour compromise.

“The political wrangling in Washington is intense,” she said, amid deep rifts on how to pair an increase in the $14.3 trillion US debt limit with painful steps to reduce a massive budget deficit.

“I am confident that Congress will do the right thing and secure a deal on the debt ceiling and work with President Obama to take steps to improve our long-term fiscal outlook,” the top US diplomat said in Hong Kong.

There were few signs of any emerging consensus, with Republicans who lead the House of Representatives and Democrats who control the Senate set to push rival plans after successive efforts to forge compromise collapsed acrimoniously.

House Republicans were to meet behind closed doors at 2:00 pm (1800 GMT) to discuss a strategy driven by House Speaker John Boehner, while House Democrats led by Minority Leader Nancy Pelosi were to gather at 5:30 pm (2130 GMT).

Democratic Senate Majority Leader Harry Reid was pressing ahead with his own plan after meeting late Sunday with Pelosi and Obama, and was to meet at 6:00 pm (2200 GMT) with his rank-and-file.

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Washington hit its debt ceiling on May 16 but has used spending and accounting adjustments, as well as higher-than-expected tax receipts, to continue operating normally but can only do so thought August 2.

At that point, US leaders will face an agonizing choice about cutting an estimated 40 cents of every dollar in spending and defaulting either on debt payments or on other obligations like government health or retirement benefits.

And finance and business leaders have warned failure to raise the US debt ceiling by then would send shockwaves through the fragile world economy, while Obama has predicted a default would trigger economic “Armageddon.”

But while stocks pulled back around the world in the face of Washington’s angry stalemate, there were no signs of panic.

All sides in the dispute agree cash-strapped Washington must reduce its deficit but disagree on the size and blend of spending cuts and revenue increases as well as on how and whether to slice into the social safety net.

Republicans have rejected Obama’s call for tax hikes on the rich and wealthy corporations and oppose raising the debt ceiling enough to spare him another politically painful standoff before he faces reelection in November 2012.

Boehner said on his official Twitter feed Monday that the president sought a $2.4 trillion “blank check to get him through the next election, w/out cuts; this is indefensible.”

Republican sources said Boehner, who braced his troops for “sacrifices” in any final deal, planned to show them a new, two-step approach with a short-term increase in the debt limit tied to some $3-$4 trillion in spending cuts.

Reid has rejected Boehner’s approach and said that he was pushing a plan to raise the debt limit enough to last to 2013 while cutting some $2.7 trillion in spending, without revenue increases that inflame Republicans.

The fate of the rival plans was unclear, but both chambers faced a time-consuming process to pass identical legislation and send it to Obama to sign into law with the clock ticking down.

© AFP — Published at Activist Post with license