World Leaders Stunned by Dysfunction in Washington

By Andy Sullivan and Richard Cowan, Reuters

30 July 11

he House of Representatives approved a Republican deficit plan on Friday that has no chance of becoming law but could pave the way for a last-ditch bid for bipartisan compromise to avert a crippling national default.

With time running short ahead of a Tuesday deadline to raise the debt ceiling, the Republican-controlled House pushed the deficit-cutting plan through by a vote of 218-to-210 after the party's leaders reworked the bill to appease anti-tax conservatives in their ranks.

The legislation, denounced earlier by President Barack Obama who had admonished lawmakers to stop wasting time and find a way "out of this mess," was doomed to defeat in the Democratic-led Senate where all of Obama's Democrats have vowed to vote against it later on Friday.

But the House vote broke weeks of political inertia and opened the door to talks on a compromise that could pass Congress before Tuesday. That is the deadline to lift the $14.3 trillion US debt limit or else render the world's largest economy unable to pay all of its bills.

Delays and procedural hurdles will now make it all but impossible for Congress to strike a deal and send it to Obama's desk until the 11th hour, injecting a dangerous level of uncertainty into already rattled global financial markets. A late deal also raises the prospect of the United States losing its top-notch AAA credit rating.

Both sides have been at impasse for weeks with lawmakers locked in a blame game that has brought the country to the brink of an unprecedented default, which could plunge America back into recession and trigger economic turmoil globally.

World leaders have been stunned by the dysfunction in Washington. World Bank President Robert Zoellick on Friday said the United States was playing with fire.

America's largest foreign creditor, China, has repeatedly urged Washington to protect its dollar investments and its state-run news agency on Friday said the United States had been "kidnapped" by "dangerously irresponsible" politics.

Boehner Placates Enough Recalcitrants

House Speaker John Boehner's failure on Thursday to quell a rebellion among Tea Party-affiliated conservatives in his party and bring his proposal to a vote exposed a rift among Republicans that complicated efforts to reach a compromise.

But Boehner brought enough of his recalcitrant Republicans onboard on Friday with a retooled plan that included a requirement for Congress to pass a balanced budget amendment to the Constitution and send it to the states for ratification, a long-time core demand of fiscal conservatives.

"I stuck my neck out a mile to try to get an agreement with the President of the United States," Boehner said on the House floor shortly before the vote, his voice rising.

"Where are other ideas?" he asked as he accused Obama of failing to come up with a plan of his own. Republicans applauded loudly and Democrats hissed.

Boehner's two-step plan would cut spending initially by about by about $900 billion and lift the debt ceiling only enough to last a few months. That would mean a re-run of the acrimonious debate which Obama is determined to avoid at a time when he will be deeper into 2012 re-election campaign.

Top Senate Democrat Harry Reid has said a short-term solution is unacceptable and is pushing his own bill that would cut $2.2 trillion in spending over 10 years.

Reid's plan is expected to be amended to make it more palatable to moderate Republicans in the House, and, with Democratic votes, offset the inevitable loss of support from anti-tax Tea Party-aligned Republicans.

Jittery financial markets will be watching what is expected to be a weekend of hard bargaining and further brinkmanship.

"This is just a signal that Republicans have rallied around a common set of ideas. But they still have to negotiate with Democrats," said Michael Woolfolk, senior currency strategist with BNY Mellon in New York. "We're going to have to wait until next week."

Obama, who has been sidelined in recent days by the debt battle on Capitol Hill, said the parties were not that far apart on spending cuts. "There are plenty of ways out of this mess but we are almost out of time," he said earlier.

Shortly before the House vote, ratings agency Moody's signaled it probably will not downgrade the United States' triple-A credit rating immediately, even if there is no deal to raise the debt ceiling, but a cut could come in the medium term.

Moody's said the United States would still have enough money to pay its debts to bondholders after Tuesday.

Rival ratings agency Standard & Poor's has warned it could cut the rating soon if there is no deal to address the underlying budget problems, a move which could push up US borrowing costs and further hobble the weak economic recovery.

Fears about the health of America's economy multiplied after a government report showed weaker-than-expected growth in the first half of the year, raising the risk of recession.

The government reported US gross domestic product grew at an anemic pace of 1.3 percent in the second quarter. Growth during the first quarter was revised sharply down to a meager 0.4 percent pace.

(Additional reporting by Rachelle Younglai, Donna Smith, Lily Kuo, Margaret Chadbourn, Laura MacInnis, Tabassum Zakaria in Washington and Karen Brettell, Steven C. Johnson and Jennifer Ablan in New York; Writing by Stuart Grudgings and Matt Spetalnick.)