The United States on Wednesday stood hours from a fateful fiscal deadline, with a chaotic political standoff threatening to trigger a debt default and rock the global economy.
Hopes that Congress would agree to raise the government’s borrowing authority as required by midnight rested with last gasp talks in the Senate – with America’s top notch credit rating on the line.
Any deal though would have to make it through the Republican-led House of Representatives, where conservative Tea Party lawmakers have thwarted previous compromise efforts in a bid to undermine Democratic President Barack Obama.
If Congress fails to raise the US$16.7 trillion debt ceiling in time, the US Treasury would begin to run out of money to meet all US obligations and slip towards a historic default.
Such a scenario could badly damage the US recovery, saddle American consumers with higher interest payments and send economic shockwaves into fragile global economies.
In Asia, stocks fell early on Wednesday as investors kept an eye on the American impasse. In Tokyo, the benchmark Nikkei 225 index gave up early gains to slip 0.16 per cent, 23.44 points, to 14,418.10. In Hong Kong stocks eased 0.39 per cent by the lunchtime break.
The two old foes saddled up after manoeuvring by the House on Tuesday dissolved in chaos. Republican Speaker John Boehner proved unable to win support from his caucus and unwilling to use minority Democratic votes to raise the debt ceiling and re-open the US government after a two week shutdown.
In the face of the deadline, the US political system, divided between Obama’s Democrats and Republicans who run the House, has virtually ground to a halt.
Major world powers have been left looking on in dismay at the brinkmanship in Washington, unable to do anything to protect their own economic interests, with many deeply invested in US Treasuries – hitherto seen as one of the safest global safe havens.
Amid rising anxiety on the markets, the financial rating agency Fitch put the United States on warning for a downgrade from its top-grade AAA spot.
Despite the deepening impasse, Obama said he still expected the issue would be resolved in the end.
“My expectation is that this gets solved, but we don’t have a lot of time,” he told an ABC television affiliate in New York.
“What I’m suggesting to the congressional caucus is to avoid any posturing ... do what’s right, open the government and make sure we pay our bills.”
What was essentially a wasted day, with precious few hours to spare on Tuesday, unfolded as House Republicans tried to extend US borrowing authority until February 7 and re-open the government until December 15.
Several draft bills would have constrained aspects of Obama’s signature health care law – and in effect stood no chance to pass the Democratic-led Senate.
But Boehner used the measures to try to corral the Tea Party faction and to pressure the Senate – but in the end was unable to amass sufficient Republican votes to even put the measures on the floor.
Senate talks, which had been on hold all day pending developments in the House, were quickly resumed on Tuesday evening.
Leadership aides on both sides said they were “optimistic” that an agreement was in reach.
“We’re making very, very good progress, we’re not there yet, but we’re getting real close,” said Democratic Senator Chuck Schumer.
“I think the markets should feel pretty good about what’s going on here tonight.”
Republican Representative Charlie Dent of Pennsylvania told CNN: “I believe that John Boehner will likely be in a position where he will have to essentially pass the bill that is negotiated between senators McConnell and Reid, and I believe that the House will first pass it and send it to the Senate.”
The likely Senate deal would require Democrats to make a minor concession on Obamacare. But the provision would fall well short of the drive to delay or defund the historic law that prompted Republicans to launch the government shutdown strategy and to use the debt ceiling hike as leverage.
Earlier, Reid furiously accused Boehner of seeking to save his own political skin at the expense of the United States.
“Let’s be clear: The House legislation will not pass the Senate,” Reid said. “I am very disappointed with John Boehner, who would once again try to preserve his role at the expense of the country.”
Boehner may once again on Wednesday be left with the unenviable choice that has come to define his speakership in Washington’s divided government.
Does he stick with the Tea Party faction of his party, and possibly save his job but risk culpability in sending the US economy into a first default of modern times?
Or does he try to pass a compromise plan acceptable to Senate Democrats and Obama, with the help of minority Democratic votes – a scenario that could fritter away his party power-base and possibly cost him his job?
China and Japan, which between them hold US$2.4 trillion in US Treasuries, are already alarmed at the implications of the crisis.
Investors endured a roller-coaster day. US stock markets closed down after a day of wild fluctuations, with the Dow Jones Industrial Average shedding 133.25 points (0.87 per cent) to 15,168.01.
The broader S&P 500 fell 12.08 (0.71 per cent) to 1,698.06, and the Nasdaq Composite lost 21.26 (0.56 per cent) at 3,794.01.