WASHINGTON // Republicans and Democrats yesterday began working on separate proposals to raise the US debt ceiling before the deadline expires on August 2.
Both sides agree that a default is unthinkable. Nevertheless, world markets fell yesterday and credit agencies continue to warn that a limited deal that avoids default but does not address more long-term issues may not be enough to save the US's AAA credit rating.
Little headway was made over the weekend when Barack Obama, the US president, summoned congressional leaders to the White House for emergency talks. His angry summons came after John Boehner, the Republican speaker of the House of Representatives, said negotiations had stalled.
Mr Boehner suggested instead that congressional leaders would negotiate among themselves to reach bipartisan agreement. But those talks reached an impasse on Sunday.
Yesterday, Mr Boehner and Harry Reid, the Democrat Senate majority leader, instead each planned to present separate plans to their own parties.
Mr Boehner wants to promote a short-term extension of the ceiling along with a package of spending cuts that could save as much as US $3.2 trillion (Dh11.75) over two years. Mr Reid was pursuing a longer-term extension accompanied by $2.7 trillion in cuts.
Neither side was pushing for an increase in revenue in order to avoid Republican resistance to tax increases. But Democrats want an immediate debt ceiling increase of $2.4 trillion to see the government through next year, rather than a staggered one, as suggested by Mr Boehner.
Both plans fall far short of what Mr Obama favours. He had hoped to pursue a package of spending cuts and revenue increases that would see more than $4 trillion cut from the deficit over the next decade.
Such a plan, officials say, was the only way to calm uncertainty in jittery markets, address structural economic problems and assure credit ratings agencies and investors. A short-term debt limit might not be enough, Dan Pfeiffer, the White House communications director, warned yesterday
"Despite warnings that a short-term extension could lead to a credit downgrade and higher interest rates resulting in a tax increase on every American, Republicans in Congress continue to push for a 'my way or the highway' solution that could put our credit rating at risk and leave the cloud of uncertainty over the American people," he said.
Prospects for a short-term extension, however, have not impressed investors. A short-term plan amounts to little more than a "Band-Aid" that does nothing to address America's structural problems and the damage will be "real and long-lasting", Mohamed El Erian, the chief executive of Pacific Investment Management Company, a global investment management company and one of the world's largest bond investors, wrote in the Huffington Post.
The dollar lost ground in Asian markets when trading opened yesterday despite efforts by Hillary Clinton, the US secretary of state, to allay international fears.
"The political wrangling in Washington is intense right now," Mrs Clinton told the US Chamber of Commerce in Hong Kong. "But these kinds of debates have been a constant in our political life throughout the history of our republic. So I am confident that Congress will do the right thing and secure a deal on the debt ceiling."
The view from the UK was markedly less sanguine. Speaking to the BBC on Sunday, Vince Cable, the UK's business secretary, said "a few right-wing nutters" were the biggest threat to the world economy.
Mr Cable said: "The irony of the situation at the moment, with markets opening tomorrow morning, is that the biggest threat to the world financial system comes from a few right-wing nutters in the American Congress rather than the eurozone."