Party leaders prepare rival US debt plans
Republicans and Democrats hold separate talks on deficit-reduction deal, as markets see modest falls over uncertainty.
Last Modified: 25 Jul 2011 05:32

US politicians have failed to achieve a budget breakthrough and are instead working on rival plans in an impasse that has heightened the prospects for a catastrophic US debt fault.

With time running out, Republicans and Democrats split into opposite camps on Sunday and held talks among themselves.

There were no signs of a deal emerging to head off a default in nine days that could trigger a global economic calamity and downgrade the country's Triple-A credit rating.

Polticians missed a self-imposed deadline of producing a deficit-reduction deal by the time Asian markets opened for the week, but said they planned to outline a proposal on Monday.

A deficit deal is needed to permit a vote to increase the country's $14.3 trillion debt ceiling by August 2.

Republican House speaker John Boehner and Democratic Senate majority leader Harry Reid, were said to be assembling separate plans to raise the debt ciling.

Hilary Clinton, the US secretary of state reassured Asian investors over US debt worries' saying she was confident a deal will be reached.

"I'm confident that Congress will do the right thing and secure a deal on the debt ceiling, and work with President Obama to take the steps necessary to improve our long-term fiscal outlook," Clinton said in a speech to business leaders in Hong Kong.

Investors headed for safe haven assets like gold, pushing the metal to a new record.

Although some had predicted global markets would fall heavily without a deal before the Asian markets opened on Monday, the reaction was relatively modest.

The Japanese stock exchange closed on Monday down by 0.81 per cent, while the Hmg Kong Stock exchange fell by 0.68 per cent at the close.

US stock futures fell, signalling a poor open for US markets and showing that investors were increasingly worried about the failure of legislators to agree on one approach.

Dollar drops

Early currency trading suggested a move away from the US dollar, with the biggest drop coming against the Swiss franc.

"The fact that they seem to be jumping from one type of proposal to another and not converging on anything is beginning to worry markets," Steven Englander, head of G10 FX strategy at Citigroup, said.

"I also think damage is being done by setting deadlines that aren't going to be met," he said.

The battle is over how deeply to cut government spending on social programmes and whether to increase taxes, reflecting the challenges of divided government in an age when Republicans and Democrats are often beholden to their right and left bases of support.

Democrats want to ease the pain of spending cuts by increasing taxes on the wealthy, a prospect Republicans oppose.

Republicans want deep cuts to borrowing and spending, including entitlement programmes that pay for health care for the poor and elderly.

The party also opposes higher taxes to generate more revenue, saying they kill job-creating businesses.

Democrats oppose cutting entitlement programmes, want more revenue from taxes and want to raise the US debt ceiling beyond $14.3tn in the short term to pay the government's bills.

Washington hit its debt ceiling on May 16 but has used spending and accounting adjustments, as well as higher-than-expected tax receipts, to pay its bills and continue operating up to August.

Finance and business leaders have warned that a failure to raise the US debt ceiling by then would send shockwaves through the world economy, while Obama has predicted a default would trigger economic "Armageddon".

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