President Barack Obama and Republicans prepared for more tough talks Thursday to avert an August debt default, after Moody’s held out the threat of downgrading the sterling US credit rating.
The credit ratings agency sparked worldwide concern when it placed Washington’s triple-A debt rating on a downgrade watch because of rising prospects that bitterly divided US leaders would fail to strike a deal.
China also expressed concern after its Dagong credit ratings agency echoed Moody’s by putting US sovereign debt on downgrade watch, citing weak US economic growth and the likelihood that fiscal deficits would remain high.
The unease in Beijing raised the specter of global economic consequences should Washington fail to raise its debt ceiling, as China is by far the top holder of US debt, with $1.153 trillion in April, according to US data.
“We hope the US government adopts responsible policy and measures to ensure the interests of investors,” foreign ministry spokesman Hong Lei said.
US central bank chief Ben Bernanke said Wednesday that a default would provoke a major economic crisis, risk a second recession and “throw shock waves through the entire global financial system.”
Obama was to hold a fifth straight day of negotiations with Republicans and fellow Democrats at 4:15 pm (2015 GMT) Thursday, and planned to take stock of the apparent stalemate on Friday, a Democratic aide said.
“Friday is not a hard deadline,” an aide said after Wednesday’s contentious talks, but “the clock is ticking, they have to get this done.”
Obama needs the Republican-led House of Representatives and Democratic-held Senate to sign off on a deal to close the yawning US deficit while allowing cash-strapped Washington to borrow past an August 2 deadline.
The president has pressed for a comprehensive deal to last through his 2012 reelection campaign.
Treasury Secretary Tim Geithner will brief Senate Democrats Thursday on the state of the talks.
Obama has called for cuts to social safety net programs dear to Democrats; while Republicans have rejected his proposed tax hikes on the rich, arguing it would smother investment and crush already weak job growth.
Tensions boiled over Wednesday, when Obama heatedly rejected Republican House Majority Leader Eric Cantor’s push for a short-term deal anchored on spending cuts, according to key Republican and Democratic aides.
Obama said he would veto such a stopgap measure.
“Don’t call my bluff,” he warned Cantor, adding that he was ready to take his case to US voters, according to aides on both sides.
Republican aides described Obama as storming out of the meeting in a huff, while their Democratic counterparts said that the presidential rebuke left Cantor chastised and speechless.
“I’ve reached my limit. This may bring my presidency down, but I will not yield on this,” Obama said, according to a Republican aide.
The president’s message was “enough posturing,” said a Democratic aide, who said Obama did not storm out but simply concluded the meeting.
An aide to Republican House Speaker John Boehner later signalled that the lawmaker was prepared to accept a short-term deal in which spending cuts outweighed the debt limit increase and tax hikes were off the table.
The shift to a stopgap could clear the way for a plan crafted by Senate Republican leader Mitch McConnell that would effectively see the debt limit rise only with Democratic votes and without guaranteed spending cuts.
Leading Democrats and the White House greeted McConnell’s proposal cautiously, but it was unclear whether the plan would rally enough Republican support to pass the divided US Congress.
Republicans have embraced fiscal discipline since Obama took office, after years of having backed massive tax cuts and rejected paying for wars in Afghanistan and Iraq or a costly increase in a popular health care program.
The US debt ceiling now stands at $14.29 trillion and the budget deficit is expected to hit $1.6 trillion this year.
The US hit the ceiling on May 16 and has used spending and accounting adjustments, as well as higher-than-expected tax receipts, to continue operating without impact on government obligations.
But by August 2, the government will have to begin withholding payments to bond holders, civil servants, retirees or government contractors.