Monday, October 7, 2013

China Lectures Obama as Shutdown Enters Week Two With No End in Sight

As the U.S. government moved into the second week of a shutdown on Monday with no end in sight, Chinese officials warned President Barack Obama and Congress Monday that the "clock is ticking" to avoid a U.S. default that could hurt China's interests and the global economy.

China, the United States' largest creditor, is "naturally concerned about developments in the U.S. fiscal cliff," vice finance minister Zhu Guangyao told the BBC.

"The executive branch of the U.S. government has to take decisive and credible steps to avoid a default on its Treasury bonds," he said, referring to President Obama.

Editor's Note: 22 Hidden Taxes and Fees Set to Hit You With Obamacare. Read the Guide to Protect Yourself.

"It is important for the U.S. economy as well as the global economy."

"We hope the United States fully understands the lessons of history," Mr. Zhu said, referring to a similar deadlock in 2011 that led to a downgrade of the U.S. "AAA" credit rating.

A deadlocked U.S. Congress, meanwhile, confronted an Oct. 17 deadline to increase the nation's borrowing power or risk default.

But House Speaker John Boehner vowed not to raise the U.S. debt ceiling without a "serious conversation" about what is driving the debt, while Democrats said it was irresponsible and reckless to raise the possibility of a U.S. default.

The last big confrontation over the debt ceiling, in August 2011, ended with an eleventh-hour agreement under pressure from shaken markets and warnings of an economic catastrophe if there was a default.

The White House signaled on Monday that it would be open to a short-term hike in the nation's borrowing authority as the United States moved a step closer to its first-ever default and a partial government shutdown entered its second week.

Gene Sperling, a senior Obama economic adviser, was pressed on whether he would rule out a two- or three-week extension on increasing the nation's $16.7 trillion debt limit. Treasury Secretary Jack Lew has warned that on Oct. 17, he exhausts the bookkeeping maneuvers he has been using to keep borrowing.

"There's no question that the longer the debt limit is extended, the greater economic certainty there will be in our economy, which would be better for jobs, growth, and investment," Sperling told a breakfast sponsored by the newspaper Politico. "That said, it is the responsibility of Congress to decide how long and how often they want to vote on doing that."

Sperling reiterated Obama's vow not to negotiate on the debt because it would sanction the threat of default as a bargaining chip and increase the chance of default in the future.

Senate Democrats could introduce legislation as soon as Monday that gives the president the authority to raise the debt ceiling unless two-thirds of Congress disapproves, according to a Senate Democratic aide.

An initial test vote on the proposal, described by the aide on condition of anonymity, could occur as soon as Oct. 11, just six days before federal borrowing authority is set to expire.

Democrats have been pressing for a one-year increase in the nation’s $16.7 trillion debt ceiling without any of the spending cuts of policy changes Republicans are demanding.

The method of giving Obama the authority to raise the debt ceiling barring a congressional disapproval was first proposed by Senate Minority Leader Mitch McConnell, a Kentucky Republican, in 2011 and became part of the Budget Control Act passed in August of that year.

The Senate Democratic aide said that strategy could make it easier to get Republican votes because no Republican would have to vote directly for a debt-ceiling increase. Senate Majority Leader Harry Reid, a Nevada Democrat, said last week in an interview with Bloomberg News that he would move a "clean" debt ceiling increase bill before Oct. 17, when the Treasury expects borrowing authority to lapse.

A last-minute resolution remains a distinct possibility this time.

Equities investors were unnerved by the apparent hardening of stances over the weekend. U.S. stocks opened sharply lower on Monday and European shares fell to a four-month low.

In comments on Sunday television political talk shows, neither Republicans nor Democrats offered any sign of impending agreement on either the shutdown or the debt ceiling, and both blamed the other side for the impasse.

"I'm willing to sit down and have a conversation with the president," said Boehner, speaking on ABC's "This Week." But, he added, Obama's "refusal to negotiate is putting our country at risk."

On CNN's "State of the Union," Treasury Secretary Jack Lew said: "Congress is playing with fire," adding that Obama would not negotiate until "Congress does its job" by reopening the government and raising the debt ceiling.

"Who should be worrying most of a possible U.S. default?" asked Deutsche Bank analysts. "Looking at the top holders of U.S. Treasuries, recipients of U.S. Social Security should be most concerned, followed by the Fed and then China."

Democratic Sen. Charles Schumer, whose constituency includes Wall Street and New York's financial hub, said Boehner would be forced to act as the deadline for the nation's debt ceiling gets closer, calling it "too dangerous" to not raise the U.S. debt limit and saying any default could lead to an economic "recession, depression or worse."

"The economy could collapse. Will it? No one's certain, but there's a high enough chance that no one — no one — should risk it," Schumer told CNN's "New Day."

The two issues of the federal government shutdown and the debt ceiling started out separately in the House but have been merged by the pressure of time.

Conservative Republicans in the House have resisted funding the government for the current fiscal year until they extract concessions from Obama that would delay or defund his signature healthcare law, which launched Oct. 1.

Many of the conservatives want a similar condition placed on raising the debt ceiling, but in his list of debt-ceiling demands Sunday, Boehner did not mention the Affordable Care Act, commonly known as Obamacare.

"It's time to talk about the spending problem," said Boehner, including measures to rein in costs of entitlement programs such as the Social Security retirement system and Medicare, the government-run health insurance program for seniors.

Harry Reid, leader of the Democratic-led Senate, is expected to decide soon on whether to try to open formal debate on a "clean" bill, without extraneous issues attached, to raise the U.S. Treasury's borrowing authority.

Passage of such a measure would require at least six of the Senate's 46 Republicans to join its 54 Democrats in order to overcome potential procedural hurdles that opponents of Obamacare could erect.

According to one Senate Democratic aide, the debt limit hike might be coupled with a new initiative to reform the U.S. tax code and achieve long-term savings in Social Security and Medicare, whose expenses have soared along with the population of retirees.

Republican lawmakers have floated other ideas, such as a very short debt limit increase, which would create time for more negotiations at the expense of further market uncertainty, and repeal of a medical device tax.

The tax is expected to generate some $30 billion over 10 years to help pay for healthcare insurance subsidies under Obamacare.

Some Democrats favor repealing the tax, but they insist that replacement revenues be found and repeal be considered only after the government reopens and the debt limit is raised.

Agreement in the Senate would send the tangle of issues back into the House, where the Republican caucus has adopted a hard line on both Obamacare and the debt ceiling.

Editor's Note: 22 Hidden Taxes and Fees Set to Hit You With Obamacare. Read the Guide to Protect Yourself.

There may be enough votes in the House to pass a clean bill, according to some analysts. That would require almost all of the House's 200 Democrats and about 20 of its 232 Republicans to vote in favor. But taking such a vote would require Boehner to violate his policy against bringing a vote on any legislation favored by less than a majority of House Republicans.

Reid spokesman Adam Jentleson issued a statement Monday attacking what he called "Boehner's credibility problem," including the speaker's assertion that there are not enough votes in the House to pass a clean bill.

"There is now a consistent pattern of Speaker Boehner saying things that fly in the face of the facts or stand at odds with his past actions," Jentleson said. "Americans across the country are suffering because Speaker Boehner refuses to come to grips with reality."

For the moment, neither side is moving toward accommodation, and the stakes rise with the passage of time.

For any deal to work, negotiators probably would have to choreograph a multipronged approach that allows all sides to declare victory, even if it is one that sets up another battle in mid-November or December.

White House officials were firm Monday that Obama will not negotiate under the threat of a default and repeated that it is up to Congress to raise the U.S. borrowing cap.

While the shutdown itself is unlikely to cause major disruption in the markets, a fight over the debt ceiling could. From July 31 thru Aug. 2 during the debt-limit standoff in 2011, the S&P 500 index lost 3 percent, and the deadlock led to a downgrade of the U.S. credit rating to AA-plus from AAA by S&P.

The outlooks from Moody's and S&P, the only agency so far to have lowered its rating on U.S. debt, are both at "stable," but Fitch Ratings has indicated a negative outlook for the U.S. debt rating.

All three agencies have said the U.S. debt profile has improved substantially over the past two years, with gross domestic product growth, while slow, proving to be persistently positive and the budget deficit trending lower.

Fitch said in a note last week that the U.S. rating is at risk in the current showdown over the debt ceiling because failure to raise it sufficiently in advance of the deadline raises questions about the full faith and credit of the United States to honor its obligations.

Political gridlock remains the greatest risk to the U.S. outlook, Fitch said in the note on Oct. 1, the first day of the partial government shutdown.

"This 'faith' is a key underpinning of the U.S. dollar's global reserve currency status and reason why the U.S. 'AAA' rating can tolerate a substantially higher level of public debt than other 'AAA' sovereigns," Fitch said.


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