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13Jul11


Obama, Republicans clash in debt talks


President Barack Obama clashed with Republican lawmakers on Wednesday in a fierce White House meeting on deficit reduction that left a deal in question as the clock ticked toward a debt default.

"Enough's enough," Obama said, according to a Democratic official familiar with the talks.

The meeting came as Moody's Investors Service jolted Washington with a stark warning that the United States may lose its top credit rating in the coming weeks if the $14.3 trillion limit on America's borrowing was not raised.

Potentially souring efforts to raise the debt ceiling while putting off talks about spending cuts and tax increases, Moody's said it would likely assign a negative outlook to the nation's gold-plated credit rating if a credible agreement with long-term deficit reduction measures was not achieved.

That warning sent the dollar tumbling against most major currencies. Stock futures and debt prices also fell.

Eric Cantor, the No. 2 Republican leader in the House of Representatives, said the talks on Wednesday became so acrimonious that Obama walked out.

"He said he had sat here long enough. No other president, Ronald Reagan wouldn't sit here like this," Cantor told reporters.

Democratic officials called Cantor's account overblown.

The two sides will meet again on Thursday at 4:15 p.m. EDT

The White House and Congress must forge a deal to raise America's debt limit by August 2 or the government will run out of money to pay its bills and default on some obligations. But they have so far failed due to a sharp divide over taxes.

The president and lawmakers met for nearly two hours on Wednesday, to cut a deal. Republicans demand $2.4 trillion in spending cuts in return for supporting an increase in the debt limit. Democrats and Obama insist on tax increases for the wealthy as part of a deal.

Obama accused Republicans of partisan posturing that was keeping the two sides from agreement.

Taxes will dominate the discussions on Thursday. The president has set a Friday deadline for agreeing a way forward, officials from both parties said.

Washington Stalemate

Talks have become more acrimonious in the past few days, as Republican and Democratic leaders have lashed out at each other and hardened their positions, making compromise difficult.

While the specter of Moody's announcement hung over Wednesday's White House meeting, it unnerved traders and refocused the attention of investors on the stalemate in Washington.

"They (Moody's) are worried they are having these ideological arguments while Rome burns. They want to say this is serious," said Carl Kaufman, portfolio manager at Osterweis Capital Management in San Francisco.

The last time the United States was placed on review for downgrade was in 1996, by Moody's.

"What has been beginning to spook Moody's and some other people is that Congress may be dumb enough to actually default on the debt," said Cliff Draughn, chief investment officer at Excelsia Investment Advisors in Savannah, Georgia.

Treasury Secretary Timothy Geithner emphasized in the White House meeting that Moody's had called for the need for deficit reduction in addition to a rise in the debt ceiling, a Democratic official said.

A spokesman for Speaker of the House John Boehner said Moody's warning proved the need for spending cuts.

Underscoring the effect a potential default would have on financial markets, Federal Reserve Chairman Ben Bernanke said the United States would pay creditors first if Washington failed to raise the borrowing limit in time.

That would mean other payments, such as Social Security to the elderly, would be the first hit -- a political nightmare for both lawmakers and the president.

Bernanke's statement, aimed at reassuring investors that the United States would not default on its debt, stood at odds with the Obama administration, which has repeatedly played down a "Plan B" scenario, or short-term solution, if the debt ceiling was not raised.

Focused on Long-Term Deal

Although officials said Obama repeatedly has rejected proposals for such a move, the yawning gap between the U.S. leader and Republicans means a short-term boost to the debt limit has not yet been taken off the table.

Senate Democrats were looking to modify a plan, proposed by Senate Republican Leader Mitch McConnell, that would effectively put blame for a debt-ceiling increase on Obama.

The plan would force Congress to vote on the issue three times before the 2012 elections. But Democrats could find some political cover if those votes were paired with spending cuts, an aide said.

But the plan is opposed by conservatives, who say it would sacrifice a chance to win the major cuts they are pushing for, and it is not likely to have the votes to pass the House.

Democratic officials said Obama has backed $1.7 trillion in cuts and is prepared to accept more. But Congressional Democrats don't agree on all of those cuts, said Cantor, who put the total area of agreement at $1.4 trillion.

[Source: By Jeff Mason and Andy Sullivan, Reuters, Washington, 13Jul11]

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