President Obama and Republicans prepared for more tough talks Thursday to avert an August debt default, after Moody's held out the threat of downgrading of the sterling U.S. credit rating.
The dollar fell in Asia on Thursday after the credit-ratings agency placed Washington's sterling triple-A debt rating on a downgrade watch because of rising prospects that bitterly divided U.S. leaders would fail to strike a deal.
Chinese credit-ratings agency Dagong said it also had put U.S. sovereign debt on negative watch for a possible downgrade, citing weak U.S. economic growth and the likelihood that fiscal deficits would remain high.
The unease in Beijing raised the specter of global economic consequences should Washington fail to raise its debt ceiling, given that China is by far the top holder of U.S. debt, with $1.153 trillion in April, according to U.S. data.
U.S. central bank chief Ben Bernanke said Wednesday that a default would plunge the economy into "major crisis," risking a second recession, and "throw shock waves through the entire global financial system."
Obama was to hold a fifth straight day of negotiations with Republicans and fellow Democrats today, and planned to take stock of the apparent stalemate on Friday, a Democratic aide said.
"Friday is not a hard deadline," the aide told reporters after the contentious discussions wrapped up their fourth day, but "the clock is ticking, they have to get this done."
Obama needs the Republican-led House of Representatives and Democratic-held Senate to sign off on a deal to close the yawning U.S. deficit while allowing cash-strapped Washington to borrow past an Aug. 2 deadline.
The president, who has pressed for a comprehensive deal to last through his 2012 reelection campaign, was to send Treasury Secretary Tim Geithner to brief Senate Democrats Thursday on the state of the negotiations.
Obama has called for cuts to social safety-net programs dear to Democrats while pushing for tax hikes on the rich, a step rejected by Republicans, who charge doing so will smother investment and crush already weak job growth.
Tensions Boil Over
Tensions boiled over Wednesday, when Obama heatedly rejected Republican House Majority Leader Eric Cantor's push for a short-term deal anchored on spending cuts, according to key Republican and Democratic aides.
Obama said he would veto such a stopgap measure, warned Cantor "don't call my bluff," and declared himself ready to take his case to U.S. voters, said aides on both sides, who described the events on condition of anonymity.
Republican aides described Obama as storming out of the meeting in a huff, while their Democratic counterparts said that the presidential rebuke left Cantor chastised and speechless.
"I've reached my limit. This may bring my presidency down, but I will not yield on this," Obama said, according to a Republican aide.
The president's message was "enough posturing," said a Democratic aide, who said Obama did not storm out but left because the meeting had ended.
Hope in McConnell's Plan?
An aide to Republican House Speaker John Boehner later signaled that the lawmaker was prepared to accept a short-term deal in which spending cuts outweighed the debt-limit increase and tax hikes were off the table.
The shift to a stopgap could clear the way for a plan crafted by Senate Republican leader Mitch McConnell, which would effectively see the debt limit rise only with Democratic votes and without guaranteeing spending cuts.
Leading Democrats and the White House greeted McConnell's proposal carefully, but it was unclear whether the plan would rally enough Republican support to pass the divided U.S. Congress.
Republicans have embraced fiscal discipline since Obama took office, after years in which they backed massive tax cuts and rejected paying for wars in Afghanistan and Iraq or a costly increase in a popular health care program.
Obama has called for daily talks to reach a deal to lift the U.S. debt ceiling, now at $14.29 trillion, in the face of a budget deficit expected to hit $1.6 trillion this year.
The United States hit the ceiling on May 16 and has used spending and accounting adjustments, as well as higher-than-expected tax receipts, to continue operating without impact on government obligations.
But by Aug. 2, the government will have to begin withholding payments to bond holders, civil servants, retirees or government contractors.
Copyright Agence France-Presse, 2011