July 19, 2011 8:26 pm

Obama backs deal on US debt

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There was new hope on Capitol Hill that a sweeping deal to increase US borrowing authority and slash the nation’s deficits by $3,700bn over ten years was within reach, after Barack Obama backed an agreement among a group of Democratic and Republican senators.

Bond investors welcomed the development, with 30-year government bonds rising on hopes of a credible deal to alter the trajectory of America’s long-term fiscal issues. The yield on the “long bond”, which moves in the opposite direction from its price, fell 10 basis points on the day in New York to 4.18 per cent.

“I think it is a very significant step,” the US president said of the so-called “Gang of Six” deal. “I think we’re on the same playing field and my hope is that we can start gathering everybody over the next couple of days to choose a clear direction and get this issue resolved.”

Mr Obama warned, however, that America was still in the “11th hour” ahead of an August 2 deadline to avoid a possibly calamitous debt default. He put the onus on Congressional leaders to stop posturing and “start talking turkey”. If they failed to produce a concrete plan, he said markets in the US, the international community and the American people would start “reacting adversely fairly quickly”.

John Boehner, the Republican House Speaker, offered a lukewarm assessment of the deal struck by the senators, saying it fell short “in some important areas”. But he did not rule out accepting it and the Republican leadership on Tuesday night told members to be prepared to meet all weekend, another sign that talks were intensifying.

The deal proposed by the “Gang of Six”which includes Dick Durbin, the number two Democrat in the Senate, and Republican Tom Coburn, a fiscal hawk who has challenged his own party’s support for tax breaks for certain companies – would stabilise US debt by 2014, possibly satisfying rating agencies which have threatened to downgrade the US debt rating.

Although details were scarce, a summary of the plan said it would include $500bn in immediate deficit cuts and create a framework for further savings. These changes would include a “fundamental reform” of the US tax code that would reduce marginal income tax rates; abolish the $1,700bn alternative minimum tax, which hits middle class Americans; and reduce tax deductions and other loopholes for certain industries and individuals. It would also reform Medicare and Social Security, the government health and pension schemes.

Mr Obama reiterated the need for an alternative backstop that would avoid a default if no big fiscal compromise was reached.

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