Obama calls end to debt meeting as default day looms

Rupert Cornwell
Sunday 23 October 2011 04:06

Washington's rancorous deficit-reduction talks resumed yesterday amid dire warnings from Wall Street and open rifts in the Republican leadership – but with no sign of a deal to raise the government debt ceiling and avert an unprecedented and potentially disastrous default by the United States government.

For the fourth consecutive day, Barack Obama was due to meet congressional leaders at the White House, in the latest round of what has become a duel between himself and the majority leader Eric Cantor, the No 2 Republican in the House and de facto standard bearer of its hardline and dominant Tea Party faction.

The men clashed on Wednesday after Mr Cantor proposed an interim rise in the debt limit based on the $1.4tr (£870bn) of spending cuts on which Republicans and Democrats currently agree, to be followed by further votes on the limit ahead of the 2012 elections.

But Mr Obama again refused any short-term solution. "Don't call my bluff, Eric," Mr Cantor described Mr Obama as saying, before calling an end to the session.

More than two weeks remain until the Treasury's deadline of 2 August and the assumption remains that some formula will be cobbled together at the 11th hour. But there are now discernible jitters that the game of chicken may not have a happy ending with the Republicans being so boxed in by hardliners. The Wall Street ratings agency Moody's yesterday warned of a possible downgrade for US government bonds, while Ben Bernanke, the Federal Reserve chairman, told a congressional committee that default would "send shock waves through the entire financial system".

Industry is also increasingly anxious. The dispute over the debt ceiling is adding to uncertainty when the economy was already fragile, said Jeff Immelt, the chief executive of General Electric, who is also the chairman of Mr Obama's competitiveness council.

Complicating matters are divisions in the parties' ranks. Liberal Democrats were opposed to the major concessions on entitlement programmes that Mr Obama was offering as part of a "grand bargain" of spending cuts and tax increases of $4tr over the coming decade – that proposal initially had the blessing of the House Speaker, John Boehner, the top Republican on Capitol Hill.

But Mr Boehner has been outflanked by his deputy, the ambitious and self-styled "young gun" Mr Cantor, in a power struggle between the two men. The Speaker has now lost control of his troops in the House; even if he agreed a package with Mr Obama, he could not deliver the floor votes to pass it.

And Mr Cantor is widely believed to have his eye on Mr Boehner's job – though some senior members of his own party fear he is leading the party over a precipice.

Republican intransigence has handed Mr Obama the moral high ground, said Mitch McConnell, the Senate minority leader. He has proposed a procedural device that would allow a debt-ceiling increase to pass Congress without a single Republican vote.

Austere Italy

Italy’s finance minister Giulio Tremonti yesterday thanked opposition parties as they helped rush an eye-watering €48bn austerity package through the Senate to try and stem mounting uncertainty about the country’s ability to meet its debt repayments.

“Today in Europe there is an appointment with destiny. Without the balanced budget, the monster of debt, which comes from the past, would devour our future and that of our children," Mr Tremonti said.

Following its passage though the Senate with a majority of 25, the Lower house is expected to pass the bill by the end of today.

But the continued precariousness of the Italian economy was underlined yesterday, when ahead of the vote borrowing costs rose again, with bond yields continued to edge upwards reaching levels that analysts said were unsustainable. "Another couple of weeks like this and Italy is out of the market," said Bocconi university economics professor Guido Tabellini.

Speculative pressure against Italy had appeared to ease Wednesday evening when it became clear that the cuts package would gain swift parliamentary approval. The main opposition Democratic Party has pledged not to impede the bill’s progress with amendments, in order to allow Premier Silvio Berlusconi’s small majority to pass the measures.

Mr Tremonti had also helped calm the markets by telling the Italian Banking Association that the austerity package would be strengthened over the next four years and that Italy would press forward with a money-spinning privatisation programme once the immediate current crisis had passed.

But bond traders are continuing to look hard at Italy, the eurozone's third-largest economy, over doubts it can sustain one of the world's heaviest debt burdens and fears that it might also be forced to seek a bailouts like Greece, Portugal and Ireland. The particular fear over Italy is that she may be too big to save.

The Italian austerity package pledges to clear the country’s deficit by 2014 by slashing local grants, pensions and health spending but the country’s huge €1.8 trillion public debt pile - equivalent to 120 per cent of GDP – and sluggish growth, are never far from investors’ minds.

But Mr Tremonti stressed that no eurozone countries were safe until the current crisis had been resolved. "No-one should have any illusions of individual salvation. Just like on the Titanic, not even the first class passengers will be saved," he said, referring to Europe's stronger economies.

After welcoming Rome's austerity package as an "important step", Bank of Italy governor Mario Draghi urged the government to act swiftly on structural problems, which are seen by many as the root cause of Italy's slow growth.

The International Monetary Fund this week called on Italy to trim public expenditure and cut tax evasion. It noted, however, that “only sustained growth will reduce the burden of public debt''.

Opposition leaders blame the current government for failing to reform Italy’s economy and that say Prime Minister Berlusconi should resign once the austerity measures are adopted.

Michael Day

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