Obama warns US default would increase interest rates

WASHINGTON: President Barack Obama and Republicans traded demands for a serious deficit plan on Friday, underscoring the lack of progress and acrimony plaguing negotiations to avert a looming US government default.

Obama used a White House news conference to keep the pressure on leaders of Congress to produce a framework for a deficit-reduction plan that will head off a default on Aug. 2.

Five rounds of White House talks this week produced no agreement and much partisan bickering. The talks may resume over the weekend.

"Show me a plan in terms of what you're doing in terms of debt and deficit reduction. If they show me a serious plan I'm ready to move even if it requires me to make some tough decisions," Obama said."

House of Representatives Speaker John Boehner, the top US Republican, said Obama and Democrats had still not put a serious deficit plan on the table.

"They've been unwilling to put a real plan on the table. Without serious spending cuts ... this problem is not going to be solved," Boehner said after a meeting of House Republicans.

Congress must raise the $14.3 trillion limit on America's borrowing by Aug. 2 or the government will run out of money to pay its bills. Republicans have insisted the government commit to cutting the deficit before they sign on for more debt.

But talks have been deadlocked over spending and taxes. Obama said he has agreed to large spending cuts and wants Republicans to accept some tax increases on wealthier Americans to help bring down America's record $1.4 trillion budget deficit. Republicans refuse.

Obama suspended budget negotiations for Friday, telling congressional leaders to come up with a "plan of action" on how to unblock talks meant to cut deficits and avert a US debt default.

Republican leaders on Friday said they will pass legislation next week that would link a debt-ceiling increase with deep, immediate spending cuts, a cap on future spending levels and a constitutional amendment that would require Washington to balance its budget each year.

The balanced-budget amendment has little chance of reaching the two-thirds vote needed to pass the Senate.

TIME RUNNING SHORT

House Democratic Leader Nancy Pelosi called it ""outrageous."

With time running short, the House and Senate seem to be coalescing around sharply contrasting legislation.

Democratic and Republican leaders in the Senate are working on a plan that would allow Democrats to raise the debt ceiling without Republican support. Democrats were working to add measures that would give them some political cover, such as spending cuts and a special deficit-reduction committee.

Obama, who warned earlier in the week that senior citizens might not receive Social Security checks if the country goes into default, said interest rates would also be affected in a default, increasing costs to Americans for home and car loans and beyond.

It would be, he said, "effectively a tax increase on everybody."

Financial markets are starting to worry that Republicans and Democrats are too far apart to reach a major budget agreement by the Aug. 2 deadline.

Ratings agencies Moody's and Standard & Poor's have signalled they may cut the gold-plated US credit rating if the borrowing limit is not raised and bills are not paid. Even if the United States does not default, its rating will be under pressure if negotiators do not agree to long-term deficit reduction.

Failure to seal a deal by then would cause turmoil in global financial markets and could force the United States into another recession.

Copyright Reuters, 2011