Republicans and Democrats rushed to rework rival deficit reduction plans on Wednesday, but with the fate of both proposals heavily in doubt top lawmakers pursued a behind-the-scenes compromise to avert a crippling US debt default. With the deadline less than a week away, global stock markets fell sharply on growing fears that the two sides will fail to break the stalemate.
That would mean the United States would not be able to borrow more money after August 2 and could run out of cash to pay all of its bills. Even if a deal is reached to raise the $14.3 trillion US debt ceiling, a budget plan that flinches from hefty cuts in the deficit may result in a downgrade of America's top-notch credit rating, which could sow financial chaos worldwide.
Against this backdrop, congressional leaders scrambled to find common ground, but complications surrounding their competing proposals could mean efforts to forge a compromise will go right down to the wire. The prospect of a quick resolution suffered another blow when a vote on a deficit reduction plan offered by House of Representatives Speaker John Boehner, the top Republican in Congress, was pushed back to Thursday from Wednesday amid a mutiny by some fiscal conservatives in his own party as well as stiff opposition from Democrats.
A separate plan crafted by Senate Majority Leader Harry Reid, a Democrat, also faced a setback on Wednesday when the non-partisan Congressional Budget Office said the proposal would cut $2.2 trillion from deficits, about $500 billion less than Democrats had claimed.
Boehner rushed to revise his two-step proposal after a CBO analysis found it would cut spending by $350 billion less than the $1.2 trillion over 10 years he had claimed. Obama opposes it because it would extend borrowing authority only until early next year, risking a rerun of the debt impasse during the 2012 election campaign when the president is seeking a second term.
Amid the political brinkmanship, the two parties have been having ongoing conversations about how to break the impasse, Democratic Senator Kent Conrad said. "One thing I'm quite confident of is we are not going to default. Leaders on both sides recognise now that that would be a disaster," Conrad said.
But weeks of acrimonious dealings may make it hard to narrow the partisan differences. Republicans control the House and President Barack Obama's Democrats control the Senate. Signalling a potential for compromise, Reid said when asked if the two plans were the only options: "We can change any one of them very easily." But Reid said every Democratic senator would vote against the current Boehner proposal if it is passed by the House and goes to the Senate.
While Democrats and Republicans publicly were pushing their respective proposals, bipartisan talks quietly continued. Senate Democratic aides said they hoped that once Boehner's plan is killed - either by the House or Senate - then support will grow for Reid's one-step remedy, which Obama backs.
As currently written, Reid's approach would save more than the Republican plan and would extend the debt limit beyond the November 2012 elections. "More people will turn their attention to our bill and give it a second look" and "some version" of it would be put to a vote, a Democratic aide said.
Meanwhile, the gridlock dragged global stocks down on Wednesday, particularly in Europe. Major US exchanges slipped by 1 percent or more on nervousness over unfavourable company news and the faltering debt talks in Washington. Worried investors shifted funds into traditional safe havens gold and the Swiss franc, which both rose to record highs in dollar terms.
Still, there have been no signs of panic in markets because most investors expect a deal to be struck by the deadline. Adding to that view, Deven Sharma, president of rating agency Standard & Poor's, told a congressional committee the ratings agency does not think the United States will default on its debt. "Our analysts don't believe they would," he said.