Obama in make-or-break talks to avoid debt default

(AFP PHOTO / Saul LOEB)

With a potential US debt default less than four weeks away, President Barack Obama has summoned Congressional leaders to the White House today in a new bid to break the deadlock over the budget deficit reduction package that Republicans insist must accompany an increase in the country's borrowing ceiling.

But the prospects of an early deal still look dim. The Speaker of the House, John Boehner, the top Republican on Capitol Hill, warned that the discussions "will be fruitless unless the President recognises economic and legislative reality", while Jay Carney, the White House spokesman, told reporters yesterday that this latest debt summit was only a start, and that further meetings would be needed.

According to the Treasury, the US will hit the current debt ceiling of $14.3trn on 2 August, at which point, in theory, the government will be unable to make debt repayments or pay social security benefits to its citizens. In reality, no one knows exactly what will happen. What is clear is that neither side is budging. Both Democrats and Republicans roughly agree on the size of the savings needed, some $3trn over the next decade. But on the means to that end, they are as far apart as ever.

Democrats say they are ready to make substantial spending cuts, including to their cherished entitlement programmes of social security and Medicare. But, they insist, some tax increases are required, many of them to be achieved by closing loopholes. For Republicans however, tax increases in whatever form are off the table.

A fortnight ago, the most recent discussions, led by Vice-President Joe Biden, collapsed after Republicans walked out in protest at mooted tax increases. Now Mr Obama has stepped into the fray in person, and negotiations have entered the make-or-break phase.

Economists warn that the financial consequences of even a partial US default would be devastating, but the political posturing has not yet frightened the markets because they believe there will be a 11th-hour deal.