US Warned of Credit Downgrade as Republicans Inch Closer to the Brink

A leading ratings agency put the the US on notice of a downgrade on Tuesday amid political turmoil in Washington over how to resolve the budget crisis less than a day before the country's borrowing requirement expires.

Fitch warned that the political battle "risks undermining confidence in the role of the US dollar as the pre-eminent global reserve currency, by casting doubt over the full faith and credit of the US."

The White House seized on the announcement, saying that it demonstrated the urgency of reaching a deal.

But senior Republicans in the House of Representatives inched further to the brink on Tuesday night when they abandoned a planned vote on a so-called continuing resolution, which would have extended the debt ceiling and reopened the federal government.

It became clear that John Boehner, the House speaker, could not muster enough votes to push through the plan. In an attempt to placate the conservative wing of his caucus, Boehner added a provision that would have stripped members of Congress, the president and their staffs of their employer-provided health insurance.

But after conservative lobby groups came out against the plan, Boehner could not attract a majority of Republican votes.

A day that ended in turmoil began with recriminations when the House rejected a fragile bipartisan deal that emerged from the Senate on Monday night. That deal would have extended the debt limit and authorised government spending with only one token concession over healthcare.

Boehner then floated an alternative compromise that would have, in addition, delayed a new tax on medical devices designed to help pay for the Affordable Care Act and deprive lawmakers of any personal health insurance subsidies. That succeeded only in inflaming conservatives in his own party, who regard the House and Senate compromises as surrender, and Democrats who accused Boehner of introducing unacceptable new "ransom demands".

The Republican leadership dropped the medical device tax provision, but pushed on with a plan to cut healthcare from congressional and White House staff, which amounted to an $18,000-a-year pay cut for most staffers. The resolution got as far as being published on the House rules committee website, before a vote was postponed. It was unclear what the next political moves would be.

Shortly before 6:30pm, with House Republicans in disarray, a succession of GOP leaders arrived for crisis talks in Boehner's office. It looked set to be a long meeting; congressional staffers were spotted delivering boxes of pizza.

Harry Reid, the Democrat majority leader in the House, earlier held the speaker personally to blame for bowing to pressure from his conservative wing. "I am very disappointed with John Boehner, who is trying to preserve his role at the expense of the country," he said.

House minority leader Nancy Pelosi said the Republican plan "sabotages a good-faith, bipartisan effort by the Senate and is a luxury our country cannot afford". Her chief whip Steny Hoyer claimed Republicans wanted to "snatch confrontation from the jaws of reasonable agreement".

The White House also emphatically rejected the new Republican approach.

"The president has said repeatedly that members of Congress don't get to demand ransom for fulfilling their basic responsibilities to pass a budget and pay the nation's bills. Unfortunately, the latest proposal from House Republicans does just that, in a partisan attempt to appease a small group of Tea Party Republicans who forced the government shutdown in the first place," spokeswoman Amy Brundage said in a statement.

"Democrats and Republicans in the Senate have been working in a bipartisan, good-faith effort to end the manufactured crises that have already harmed American families and business owners," she continued. "With only a couple days remaining until the United States exhausts its borrowing authority, it's time for the House to do the same."

As the wrangling continued in Washington, Fitch said it had reached its conclusion because of the increased possibility that the US will not reach a deal on its debt ceiling before 17 October, when Treasury secretary Jack Lew has said the US will run out of cash. "Although Fitch continues to believe that the debt ceiling will be raised soon, the political brinkmanship and reduced financing flexibility could increase the risk of a US default," said Fitch.

The agency's move came as US investors appear to be increasingly nervous that the impasse in Washington could lead the US to default on its obligations for the first time in history. The Dow fell 133.25 points or 0.87% to end the day down after a brief rally when it appeared a breakthrough had been made.

In 2011, Standard & Poor's downgraded US debt as Democrats and Republicans argued once more about the debt ceiling. The move came amid sharp selloffs on stock markets around the world.

"The repeated brinkmanship over raising the debt ceiling also dents confidence in the effectiveness of the US government and political institutions, and in the coherence and credibility of economic policy. It will also have some detrimental effect on the US economy," said Fitch.


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