Debt showdown grows testier amid 'catastrophe' warnings

Fed willing but says third stimulus not imminent

Testy United States lawmakers pointed fingers at one another and President Barack Obama on Thursday as negotiations over raising the national debt limited entered a perilous endgame. Wall Street eyed the stand-off with growing anxiety, warning of catastrophe if the United States defaults on its obligations.

Obama's blunt declaration that "enough is enough" as Wednesday's talks ended did nothing to quell the rancour as a new day of positioning and posturing began.

Senate Majority Leader Harry Reid took to the Senate floor early in the day to snipe that House Republican Leader Eric Cantor shouldn't even be part of the talks anymore, calling him "childish".

And not long after, Senate Republican Leader Mitch McConnell stood to serve notice that the debt problem belonged squarely in Obama's lap.

"Republicans will not be reduced to being the tax collectors for the Obama economy," McConnell said. "Don't expect any more cover from Republicans on it than you got on health care. None."

None of it was a promising prelude to negotiations that were schedule to resume at the White House on Thursday afternoon, less than three weeks before an August 2 deadline for increasing the government's borrowing authority.

Obama is demanding that budget negotiators find common ground by week's end, as the financial world watches with increasing anxiety.

"No one can tell me with certainty that a US default wouldn't cause catastrophe and wouldn't severely damage the US or global economy," Jamie Dimon, CEO of JPMorgan Chase & Company, told reporters Thursday. "And it would be irresponsible to take that chance."

Moody's Investors Service said Wednesday it will review the US government's credit rating, noting there is a small but rising risk that the USG will default on its debt.

If Moody's were to lower the ratings, the consequences would ripple through the economy, pushing up rates for mortgages, car loans and other debts. A Chinese rating agency, Dagong Global Credit Rating Company, also warned of a possible downgrade.

Shock waves

Federal Reserve Chairman Ben Bernanke, addressing lawmakers, warned Wednesday that not increasing the nation's debt ceiling and allowing the nation to default on its debt would send "shock waves through the entire financial system."

Bernanke also said the central bank was prepared to provide additional stimulus if the current US economic lull persists.

Delivering his twice-a-year economic report to Congress, Bernanke laid out three options the central bank would consider.

The Fed could launch another round of Treasury-bond buying, the third such effort since 2009. It could cut the interest paid to banks on the reserves they hold as a way to encourage them to lend more. And it could also be more explicit in spelling out just how long it planned to keep rates at record-low levels. That would give investors confidence about the Fed's efforts to continue supporting the economy.

A day later, however, Bernanke clarified in a continuing appearance before Congress that a third round of bond buying to support the economy was not imminent.

The clarification saw the US dollar retracing lost ground earlier Thursday.

Morgan Stanley currency strategist Ron Leven says "the market started acting like (stimulus) was a done deal" but now recognises that "apparently, there's a high threshold before it would happen."

The euro, which had risen as high as US$1.4281 earlier, fell to US$1.4165 on Bernanke's latest comments. That is still higher than its value late Wednesday of US$1.4151.

Bernanke said Wednesday that temporary factors, such as high food and gas prices, have slowed the US economy. He said those factors should ease in the second half of the year and growth should pick up. But if that forecast proves wrong, he said the Fed is prepared to do more.

"The possibility remains that the recent economic weakness may prove more persistent than expected and that deflationary risks might re-emerge, implying a need for additional policy support," Bernanke told the House Financial Services Committee on the first of two days of Capitol Hill testimony.

Meantime, in the cauldron of the White House Cabinet Room, Obama and top lawmakers bargained for nearly two hours Wednesday on spending cuts. Obama curtly ended the session when Cantor, R-Va, urged him to accept a short, months-long increase in debt instead of one that would last through next year's presidential election.

Reid said that while other Republican leaders were willing to negotiate in good faith, Cantor "has shown he shouldn't even be at the table."

The United States hit its current US$14.3-trillion debt ceiling in May and the Obama administration says the government will default on its obligations if the debt limit is not increased by August 2. For a new debt ceiling to last to the end of 2012 would require raising it by about US$2.4 trillion.

- AP