WASHINGTON — Warnings that the United States is playing chicken with a debt default came thick and fast Wednesday, but in Washington politicians appeared no closer to avoiding the unthinkable.
As Fitch became the latest ratings agency to warn the US credit score could soon be downgraded, Republicans and Democrats continued to wrangle over a deal to avoid that fate.
As things stand, the US government will run out of room to spend more on August 2 unless Congress bumps up the borrowing limit beyond $14.29 trillion.
But amid Washington’s poisoned political atmosphere, both parties are struggling to reach a deficit cutting deal — a key Republican demand for voting in favor of a debt limit increase.
On Thursday, Vice President Joe Biden will visit Congress to hold a fresh round of talks between lawmakers, one week after previous “frank” but inconclusive discussions.
Republicans are demanding spending cuts in the trillions of dollars and no tax increases.
Democrats say they are open to cuts, as long as they do not hit healthcare for senior citizens, or other social spending, and are not so severe as to derail the recovery.
As the two sides try to broach their differences, stakeholders from Wall Street to China appeared increasingly worried the political drama in Washington would imperil the already fragile economy.
“The drama being played out in Congress over debt and spending has provided yet another source of uncertainty for the economy,” senior Federal Reserve policymaker Charles Plosser told a London audience on Wednesday.
“Progress in that arena would undoubtedly improve confidence going forward and reduce uncertainty.”
Fitch meanwhile warned that if the ceiling is not raised and the Treasury does not make timely payments, “the US sovereign rating will be placed on ‘rating watch negative.’”
A downgrade would reflect a stronger likelihood of US default, sending the price of US borrowing sharply upward and worsening the country’s already dire fiscal position.
It would also send shock waves through the financial world, which has long considered US debt a benchmark among safe-haven investments.
“The country is kind of like Thelma and Louise in that car, racing for the cliff,” said Democratic Senator Mark Warner, one of a parallel bipartisan group trying to ink a deficit reduction plan.
This was, he said, “the most predictable financial crisis we’ll ever face.”
But with his group of six senators still struggling in their bid to reach a deal, Warner was left to simply assess the chance of default.
“We all ought to be fired if this were to happen,” Warner said.
His Republican interlocutor, Saxby Chambliss, also shied away from specifics, saying he would not hazard a guess as to whether a deal would be reached, despite some optimism.
“It is a very different atmosphere in Washington right now, from at any time in the 17 years since I have been here.”
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