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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