Washington lost precious time Tuesday waiting on Republican House Speaker John Boehner to unify his caucus around ending the budget impasse, increasing the risk of default by pushing the United States hard against its statutory borrowing limit.
The Tea Party faction in the House balked at a bipartisan proposal from the Senate that would restore non-essential government services until at least January, lift the country's debt ceiling until February and set up formal negotiations over spending levels and tax rates.
Hard-liners wanted more concessions from President Barack Obama. Mr. Boehner tried all day to put together a competing proposal that would satisfy the few dozen members who identify with the Tea Party, but also stand a chance of attracting some Democratic backing. He eventually gave up, opting to regroup Wednesday.
Mr. Boehner's abortive attempt to influence the outcome of budget negotiations caused anxiety on Wall Street, where traders triggered the first trading losses on the Standard & Poor's 500 Index and the Dow Jones Industrial Average in several days. For the second time in as many weeks, a credit-rating agency said it will review whether the U.S. still deserved its AAA score for creditworthiness.
Politicians failed to extend the federal government's spending authority at the beginning of the month, triggering the cessation of all non-essential services. More crucial is the imminent end of the Treasury Department's borrowing authority, which the Treasury estimates will lapse on Thursday. That introduces the previously unimaginable risk that the world's largest economy could default on its debt. Most bankers, investors and economists say that would be catastrophic because U.S. bills and bonds form the foundation of the global financial system.
Disaster wouldn't arrive at midnight Wednesday. The Oct. 17 deadline is the Treasury's estimate of when it will run out of accounting manoeuvres to stay under the current $16.7-trillion (U.S.) ceiling. The Treasury says it still will have about $30-billion of cash on hand to pay its obligations.
Estimates of how long the cash would hold out range from a few days to the end of the month.
Washington is "playing with fire," said Sebastien Galy, a New York-based currency strategist at French bank Société Générale.
After Mr. Boehner gave up, the senators re-engaged. Various reports from Capitol Hill said Democratic Majority Leader Harry Reid and Republican Minority Leader Mitch McConnell resumed negotiations that they put on hold to await developments in the House. Those reports said Mr. Reid and Mr. McConnell were close to an agreement and could present legislation by Wednesday morning.
Mr. Boehner's proposal would have hewed to new budget deadlines on spending authority and debt ceiling in the Senate proposal. But it added conditions that the White House and Democratic congressional leaders immediately said they wouldn't support: a provision to ban the use of accounting manoeuvres by the Treasury to stay under the debt ceiling and another one that would deny Obamacare subsidies to senior officials in Washington and their staffs.
Nancy Pelosi, the Californian who leads the Democratic minority in the House, accused Mr. Boehner of "sabotaging" the Senate effort to end the budget standoff.
"He's trying hard to keep the party united," Peter King, a Republican congressman from New York who has criticized the Tea Party's intransigence, said of Mr. Boehner in an interview with CNN. "It seems very hard to keep the party united."
Even with Mr. Boehner's capitulation, it seemed highly unlikely legislation could be passed before the Thursday debt-ceiling deadline. The legislative process in the Senate is replete with procedural traps that Tea Party senators could use to slow passage of any agreement. Mr. Boehner also likely would have to concede to a free vote in the House, something he's been unwilling to grant before now.
That will test the nerve of global investors. The Standard & Poor's 500, the broadest measure of U.S. stock prices, dropped about 0.7 per cent Monday, and the Dow lost about 0.9 per cent. Stock markets in Japan and Australia were moderately higher as trading began in Asia on Wednesday.
Fitch Ratings, one of the three big firms that scores countries' creditworthiness, said after markets closed Tuesday that it was reconsidering whether the U.S. deserves the company's highest score.
"The U.S. authorities have not raised the federal debt ceiling in a timely manner," Fitch said in a statement. "Although Fitch continues to believe that the debt ceiling will be raised soon, the political brinksmanship and reduced financial flexibility could increase the risk of a U.S. default."
Toronto-based Dominion Bond Rating Service, the fourth biggest rating agency by market share, launched a similar review last week. Standard & Poor's, the world's leading credit-rating agency, downgraded the U.S. in 2011 after politicians nearly breached the debt-ceiling deadline.