Obama walks out of US budget talks
Thursday July 14 2011 | 04:04 AM

President Barack Obama late on Wednesday walked out of budget talks with Republicans, raising concerns that the White House and Congress will fail to strike a deal on fiscal policy and increase the US borrowing limit.

The abrupt end to the rancorous talks came just hours after Moody’s, the credit rating agency, warned that continued political deadlock over raising the government’s debt ceiling might lead it to downgrade the US from its triple A credit rating.

Ben Bernanke earlier on Wednesday had given his most explicit warning yet on what would happen if the debt ceiling is not raised.

In testimony before the House financial services committee, the US Federal Reserve chairman said a recession on the scale of 2008 would be “certainly conceivable” and that it would have “a very adverse effect very quickly on the recovery”.

According to one Republican aide Mr Obama stormed out of the talks after rejecting a request by Eric Cantor, the Republican majority leader, to consider a short-term extension of the debt ceiling. 

But a Democratic official who was present in the room denied that the departure had been abrupt. But the official said Mr Obama did say that the meeting had validated the reasons why Americans had misgivings about Washington and that “enough was enough”, and that the impasse had to be resolved. The discussions are due to restart later on Thursday.

The threat of a debt downgrade and the failure to reach debt deal sent the dollar lower in Asian trading on Thursday but Treasury yields were largely unaffected by the developments.

The focus of the talks on Wednesday centred on spending cuts. One Republican aide said the White House had retreated on the size of reductions it was willing to entertain without any increase in revenue, from $2,000bn last week to $1,500bn. This caused Mr Cantor to shift his stance and offer a short-term hike in the debt ceiling, the aide added.

Republicans have been opposing demands by the White House and congressional Democrats to generate new revenue by raising taxes or limiting tax deductions for the wealthiest Americans and some businesses.

The Democratic official said negotiators would on Thursday discuss enforcement mechanisms, which could mean the imposition of a budgetary straitjacket with some form of automatic trigger to slash deficits if fiscal discipline lapses. Payroll taxes and other spending cuts could also be on the agenda. 

The official added that Mr Obama had told the congressional leaders that they had until Friday to decide whether they could push for a large-scale deal or not.

Earlier this week, Mitch McConnell, the Republican leader in the Senate, suggested the use of a rare procedural mechanism to allow the president to approve an increase in the US debt ceiling without the support of Republicans. The unexpected move was greeted by the White House as strong evidence of the commitment of Republican leaders to raising the debt ceiling, underscoring the belief that a default would have devastating economic implications.

Harry Reid, the Democratic Senate majority leader, said he was still studying the plan, but noted that it “could go a long way toward resolving the impasse in which we find ourselves”.

At the same time, however, there was concern that the “escape hatch” presented by Mr McConnell would remove some of the urgency from the negotiations and seriously diminish the chances of a significant deficit reduction deal being reached over the next two weeks.

The level of ambition in the talks has already decreased in recent days, as Republicans pulled away from a deal to reduce deficits by $4,000bn over the next decade and refocused on a more limited agreement worth about $2,000bn that would delay a comprehensive solution to the country’s long-term fiscal woes until after the 2012 presidential election. Some Democrats were also unimpressed with Mr McConnell’s plan. 

“This approach fails the test of what Coloradans tell me they want, which is to materially address the debt and deficit crisis in a bipartisan and comprehensive way,” Michael Bennet, the Democratic senator, told the FT. “From that standpoint, this proposal feels a bit like a Washington gimmick that yet again enables us to avoid responsibility and kick the can down the road.”

Chris Krueger, an analyst at MF Global, said the McConnell offer “does not solve the most important sticking point of the negotiations”. Republicans are continuing to resist demands by the White House and Democrats for increases in revenue that they argue would balance the package and make wealthier Americans share some of the burden of the fiscal consolidation.

Mr McConnell’s plan is convoluted. Three times between now and the 2012 presidential election, the White House would send a request to Congress for a debt-limit increase of $700bn or $900bn. Congress would each time vote to reject the request and the president would then veto the denial.

At that point, only a two-thirds majority of Congress could overturn the presidential veto, meaning the debt ceiling increase could effectively be approved with the support of only one-third of lawmakers. Republicans would not have to take an unpopular vote to raise the debt limit, putting the burden exclusively on the Democrats.