IMF tells US to put house in order

• 48 hours to get agreement on raising debt ceiling • AAA credit rating in peril, says top bond investor The International Monetary Fund called on the United States to resolve its debt crisis amid warnings from one of the world’s most influential investors that the country risked losing its triple-A credit rating within months because of the reputational damage caused by the ongoing disagreement over the debt ceiling. Amid nervous trading on both sides of the Atlantic, the directors of the Washington-based fund “highlighted the urgency of raising the federal debt ceiling and agreeing on the specifics of a comprehensive medium-term consolidation programme” in its review of the country’s economic prospects. The urgency expressed by the IMF came after Mohamed El-Erian, chief executive of bond trader Pimco, lambasted Washington politicians for failure to reach a compromise to raise the US’s debt ceiling. Stock markets were disappointed that a deal has still not been reached, with bank shares in London being hard hit. Barclays was down nearly 4% – the largest faller – with Lloyds Banking Group and Royal Bank of Scotland also lower. The dollar lost ground in Asian trading, hitting a fresh record low against the Swiss franc, and was lower against the yen. Gold also hit a record high on Monday, touching $1,622 an ounce, in the race for investment safe havens. With time running out, Democratic leaders in control of the Senate and Republican leaders in control of the House put forward alternative plans on Monday. Although both sides blamed one another in public, there could be enough common ground in the two plans for further negotiation and an eventual deal. But El-Erian believes the dispute – carried out in full view of an anxious world – has left investors wary about America’s prospects. “In most likelihood, a last-minute political compromise will avoid a default but will leave the AAA rating extremely vulnerable,” said El-Erian, whose company is the world’s biggest bond trader. “The country can ill-afford to lose the confidence of large foreign holders of US Treasury bonds, overseas manufacturers with factories here, those that use the dollar as the reserve currency, and the many who have outsourced here the intermediation of their hard-earned savings and pensions,” El-Erian wrote in the Huffington Post. Having reached its current debt ceiling of $14.3tn (£8.7tn), America is likely to run out of money on 2 August unless Democrats and Republicans vote to raise it. Talks broke down on Friday night, with the two sides still unable to agree on a plan to address America’s debts. Republicans accuse President Obama of undermining the talks by pushing for higher taxes, prompting UK business secretary Vince Cable to blame “a few rightwing nutters in the American Congress” for the crisis. A compromise plan proposed by the Democratic leader in the Senate, Harry Reid, went a long way towards meeting Republican key demands: significant spending cuts and, crucially, no new taxes. Reid proposed cuts in the US debt amounting to $2.7tn over the next decade in return for the Republicans agreeing to raise the debt ceiling by an equivalent amount – sufficient borrowing to see the US through until after the November 2012 White House election. About $1tn of Reid’s savings would come from the anticipated drawdown of the US armed forces from costly wars in Iraq and Afghanistan. The election date is a sticking point, with the Republican leader in the House, John Boehner, proposing a shorter timeframe that would require renegotiation of the debt ceiling next summer. “It’s well understood that the president would not like to deal with a deficit reduction package in the election year,” a Republican Congressional spokesman said. Boehner is proposing a two stage approach, cuts of $1.2tn over the next decade in return for raising the debt ceiling for about a year. The second stage would involve a congressional commission proposing another $1.8tn in cuts. Democrats claimed the main obstacle to a deal was the inability of Boehner to stand up to hardline members of his party who are backed by the Tea Party movement, which wants huge cuts and no tax rises. The Democratic senator Chuck Schumer, in a television interview, said: “Everyone likes Speaker Boehner … What is happening is that instead of Boehner leading the Tea Party, he seems to be following them.” Although the deadline for default is August 2, in reality the timescale is shorter, with a bill on spending cuts and raising the debt ceiling needing to begin passage within the next few days. “I think we’ve got 48 hours within which to do something very, very meaningful,” one of the Democratic leaders in the house, James Clyburn, told cable news channel MSNBC. US economy Economics US Congress United States US politics IMF Global economy Stock markets Bonds Ewen MacAskill Graeme Wearden guardian.co.uk

Posted by on July 25, 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.