In an embarrassing development for John Boehner, the Republican Congress speaker, the Congressional Budget Office (CBO) ruled on Tuesday night that his bill would have only cut spending by $850bn (£517bn)over the next decade, not the $1.2tn he had aimed for. Republicans are now racing to rewrite the legislation, and have pushed back a congressional vote on the plan from Wednesday to Thursday at the earliest. Although Boehner was already struggling to find support for his package, the delay increases the risk that Washington will fail to agree a deal to raise the debt ceiling before 2 August, when the federal government is expected to run out of money. The dollar dropped against other currencies on Wednesday morning as investors faced the possibility that America could default. Several economists believe the country will lose its AAA credit rating within months, which would push up its borrowing costs, even if the $14.3tn debt ceiling is increased in time. The White House said on Tuesday it was working with Congress to devise a "Plan B" that might attract enough support. The two sides have been deeply divided for weeks, with Republicans demanding deep spending cuts and Democrats anxious to include tax rises as a major part of the deal.
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Wednesday, July 27, 2011
In an embarrassing development for John Boehner, the Republican Congress speaker, the Congressional Budget Office (CBO) ruled on Tuesday night that his bill would have only cut spending by $850bn (£517bn)over the next decade, not the $1.2tn he had aimed for. Republicans are now racing to rewrite the legislation, and have pushed back a congressional vote on the plan from Wednesday to Thursday at the earliest. Although Boehner was already struggling to find support for his package, the delay increases the risk that Washington will fail to agree a deal to raise the debt ceiling before 2 August, when the federal government is expected to run out of money. The dollar dropped against other currencies on Wednesday morning as investors faced the possibility that America could default. Several economists believe the country will lose its AAA credit rating within months, which would push up its borrowing costs, even if the $14.3tn debt ceiling is increased in time. The White House said on Tuesday it was working with Congress to devise a "Plan B" that might attract enough support. The two sides have been deeply divided for weeks, with Republicans demanding deep spending cuts and Democrats anxious to include tax rises as a major part of the deal.
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The Financial Times reported on Wednesday that banks are now holding on to more cash, bolstering their liquidity levels in preparation for a US credit rating downgrade that could potentially prompt a second credit crunch.
"We've been here before, post-Lehman Brothers, and we don't want to be there again," commented Cooper.
The wrangling over the debt ceiling could do long-term damage to America's economic credibility, warned Christopher Molumphy, chief investment officer of Franklin Templeton Fixed Income Group.
"The lack of a credible long-term solution would likely raise questions about the creditworthiness of the US, push up the cost of capital for private and public borrowers and thus prove a further impediment to economic recovery. There is still time for a deal to be reached on raising the debt ceiling, but continued doubts about a longer-term solution to the US's federal deficit may well threaten the country's AAA credit rating and the status of US Treasuries as assets previously perceived as virtually 'risk-free', and against which many other products are gauged," said Molumphy.
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