US debt standoff threatens to turn crisis into catastrophe

• Republicans insist on spending cuts without raising taxes • Obama sets 22 July deadline for action • JP Morgan chief warns of severe damage to global economy if US defaults The US faces the prospect of a “catastrophe” as President Barack Obama stands firm against Republican demands for deep spending cuts without any tax increases as the condition for raising the country’s borrowing limit and avoiding a debt default. With Washington gripped by a growing sense that it may be too late to avert a crisis, the president has said he will give the increasingly rancorous negotiations until the end of next week to reach agreement on the terms for raising the US’s $14.3 trillion (£8.9tn) debt ceiling. The White House has said that if there is no agreement by 22 July, then discussion about budget cuts and taxes should be abandoned in favour of legislation dealing solely with raising the debt ceiling before the borrowing limit is reached on 2 August. But the Republicans have rejected legislation without agreement on budget cuts. With European leaders also facing a potentially ruinous debt crisis, a leading Wall Street figure described the prospect of a US default as catastrophic. Jamie Dimon, chief executive of JP Morgan, one of Wall Street’s biggest banks, said: “No one can tell me with certainty that a US default wouldn’t cause catastrophe and wouldn’t severely damage the US or global economy. And it would be irresponsible to take that chance.” On Wednesday, Ben Bernanke, the chairman of the Federal Reserve, warned of a “huge financial calamity” if a political agreement is not reached. He told Congress a default would “send shockwaves through the entire financial system”. Hours later, the credit ratings agency Moody’s warned that it may downgrade the US’s AAA credit rating, saying there is a “rising possibility” that no deal will be reached by next month’s deadline. On Thursday, Moody’s threatened to downgrade the AAA ratings of government lenders Fannie Mae, Freddie Mac, Federal Home Loan Banks and Federal Farm Credit Banks, illustrating the vulnerability of the already depressed housing market to a government default. China, the US’s biggest creditor, added to the pressure (on Thursday by publicly urging Washington to protect investors’ interests. The dollar continued its fall as investors shifted to other assets such as gold, which hit a record high on Thursday. At the heart of the political wrangling is a determination by each side to blame the other for a stagnant economy, with unemployment remaining stubbornly high at above 9%. The latest economic figures showed only a 0.1% increase in retail sales and a minor drop in the number of new jobless claims – by 22,000 to 405,000 last week – suggesting the rate at which companies are laying off workers is falling. If the debt ceiling is not raised by 2

Posted by on July 14, 2011. Filed under News, Politics, World News. You can follow any responses to this entry through the RSS 2.0. You can skip to the end and leave a response. Pinging is currently not allowed.