With debt parleys at impasse, economy teeters on brink

Editor's note: As a critical deadline looms in the United States, Democrats and Republicans are at loggerheads over the debt ceiling. This page looks at where things stand and at the economic consequences.

The US government is stoking global economic fears as it faces another standoff over raising the debt ceiling as a deadline looms, with the country's two main political parties trading accusations as time runs out to avoid a potentially catastrophic US default.

President Joe Biden on Sunday called Republicans' demands for resolving the government's debt ceiling standoff "unacceptable" and said that Republicans must move off their "extreme positions" on the now-stalled talks to raise the $31.4 trillion debt ceiling. Biden planned to call the Speaker of the House of Representatives Kevin McCarthy, from Air Force One on the way back to Washington after a Group of Seven summit in Hiroshima, Japan.

Biden's negotiating team briefed him on the status of talks that broke up on Friday with no signs of progress, according to a White House official.

US Treasury Department has warned that the federal government could be unable to pay all its debts by June 1. That would trigger a default that could cause chaos in financial markets and push up interest rates.

Officials did not meet on Saturday, and they announced no progress from their meetings on Friday or any plan to talk again. Instead, both sides cast the other's proposals as too extreme.

The White House Press Secretary Karine Jean-Pierre said Biden and McCarthy had agreed that any budget agreement would need to be bipartisan and accused Republicans of offering proposals too far to the right to pass Congress.

Late on Saturday afternoon, McCarthy said he did not think talks could advance until Biden was back in the country. He accused Democrats of taking a position that was too extreme toward the left.

The White House suggested earlier on Saturday that Republicans were negotiating in bad faith.

"Stay tuned" summarized the situation — at least stay tuned until Biden returns to Washington on Sunday from the G7 Summit.

Despite the breakdown in talks, Biden told reporters in Japan on Saturday that he was "not at all" worried about the talks. They tend to move in stages, and "I still believe that we'll be able to avoid a default", he said.

Biden had said an agreement needed to be reached this weekend to clear legislation by June 1. The debt ceiling is the legal limit on government borrowing — currently set at $31.4 trillion — which was hit in January.

Unless there is an agreement, failure to raise the debt limit could trigger a first-ever US payments default. Economists have warned that failure to make critical payments such as military salaries, Social Security benefits or interest on previously issued debt could tip the nation into an unprecedented default and affect world economies.

The Washington Post reported on Saturday that Republican negotiators rejected a White House offer to limit spending next year on both the military and a wide range of critical domestic programs, according to three people with knowledge of the matter, who spoke on condition of anonymity.

Republicans are instead pushing for higher defense spending and more significant domestic spending reductions, the people said.

During talks, Biden aides offered what they said was a key concession by proposing that Congress largely hold spending constant on a wide swath of domestic programs, including education, scientific research and housing aid.

Biden's negotiators also proposed essentially holding military spending flat for next year. Biden's budget earlier this year sought big increases to both, funded by higher taxes, and holding their funding constant instead would amount to a cut of as much as 5 percent because of year-over-year inflation.

On Friday McCarthy and negotiators said spending levels were a major sticking point.

On Saturday, in remarks on Fox Business, McCarthy said he had "been very clear about where we need to go. All we're simply saying is, spend less." He added: "I think we could probably find a pretty good agreement to be able to move forward, but the White House will not budge."

McCarthy has pushed for cuts that would cut $100 billion from agency budgets, and spending cap restrictions for a decade.

Democrats want the spending cuts to last for about two years, after which appropriators could more easily increase the budget.

"This was always going to be an issue," G. William Hoagland, a senior vice-president at the Bipartisan Policy Center, a think tank in Washington, told The Washington Post. "Republicans are looking for major savings over the next 10 years, while the administration clearly does not want to lock in 10-year numbers and are looking at a much shorter time frame."

Voicing opposition

Conservative and progressive wings of the Republican and Democratic caucuses have signaled opposition to parts of the negotiated talks.

The Senate is going ahead with a planned one-week recess this week. The Senate Majority Leader, Chuck Schumer, made the announcement on Thursday. However, if a debt deal is reached senators will return to vote on it, he said.

Democrats control the Senate by a 51-49 margin. Senate rules would require at least nine Republicans to go along with any deal.

Wall Street turned lower on Friday as negotiations ground to a sudden halt. Experts have warned that even the threat of a debt default could spark a recession.

Seven of the 11 primary S&P 500 sectors ended in red, with consumer discretionary and communication services leading the laggards by losing 0.84 percent and 0.49 percent respectively. Energy and health led the gainers by rising 0.73 percent and 0.46 percent respectively.

The stock market could fall sharply if a deal does not go through by the deadline, Peter Cohan, associate professor of management practice at Babson College, a private business school in Massachusetts, told Xinhua News Agency.

What happened during debt ceiling talks in 2011 could repeat itself, and it could be worse, although what happened in 2011 was essentially a short-term phenomenon, he said.

The S&P 500 Index fell nearly 17 percent between July 22 and Aug 8 during the debt ceiling impasse in 2011.

As Democrats say they will not support deficit reduction to pay for tax cuts that drive back up the deficit and Republicans say they will not agree to anything that limits tax cuts, there is no basis for an agreement, David Super, professor of law and economics at Georgetown University Law Center, told Xinhua.

It is likely there will be an extension of the debt limit for about two months and that "negotiations will continue for most of the summer", he said.

The markets could be very unsettled in the short term, and the situation in the market could be worse than that during debt ceiling talks in 2011, Super said.

A default is likely to be catastrophic for the US economy, with spillover throughout the globe, and would probably spark a recession, observers say.

Treasury Secretary Janet Yellen warned last week that a national default would destroy jobs and businesses and would probably leave millions of families who rely on federal government payments unpaid, including Social Security beneficiaries, veterans and military families.

The US has had a legal debt ceiling for more than a century and has raised it more than 100 times, and though Congress has never failed to raise the ceiling, partisan battles have sometimes taken the country to the edge of default, as in 2011, Cal Jillson, a historian at Southern Methodist University in Dallas, told China Daily.

"When there is a Democrat president and the Republicans control one or both houses of Congress, as is the case now, the Republicans commonly try to leverage spending cuts," said Jillson, also a political scientist. "They are not so moved when the president is a Republican.

"If the US government were to default, meaning be unable to pay some or all of its obligations in a timely way, that certainly would detract from the government's credibility."

Heightening uncertainty

Hung Tran, a nonresident senior fellow at the GeoEconomics Center of the Atlantic Council, a think tank in Washington, said political wrangling over the national debt ceiling has heightened uncertainty at the wrong time and is helping to raise the chances of a severe recession.

"Beyond the near-term outlook, the recurrence of the debt ceiling 'mini crises' would erode the reliability, predictability and trustworthiness of the US government — possibly causing it to eventually lose its AAA rating and raising its funding costs," said Tran, a former deputy director at the International Monetary Fund.

"More fundamentally, the practice of using the debt ceiling as a political tool to change or terminate federal programs approved by previous Congresses reflects bad governance in the US — notwithstanding the fact that the US public debt/GDP ratio is too high and needs to be reduced over time."

Many economists and budget experts have predicted that a default would trigger significant interest rate rises, a fall in the stock market, instability throughout the financial system and the weakening of the dollar's leading role in the global economy, said William Galston, a senior fellow at the Brookings Institution in Washington.

Galston said that since 1932 voters have held the president responsible for overall economic conditions, so if not raising the debt ceiling brings about the catastrophe that many experts fear, Biden is likely to pay a price, even if his Republican challenger advocated an inflexible position that contributed to the default.

"Although the president and his advisers seem confident that they have the upper hand in this fight, a debt default could propel the Republican presidential candidate to victory in 2024," Galston wrote in a post on the Brookings' website on May 15.

Agencies and Xinhua contributed to this story.