With debt parleys at impasse, economy teeters on brink

Voicing opposition

Conservative and progressive wings of the Republican and Democratic caucuses have signaled opposition to parts of the negotiated talks.

The Senate is going ahead with a planned one-week recess this week. The Senate Majority Leader, Chuck Schumer, made the announcement on Thursday. However, if a debt deal is reached senators will return to vote on it, he said.

Democrats control the Senate by a 51-49 margin. Senate rules would require at least nine Republicans to go along with any deal.

Wall Street turned lower on Friday as negotiations ground to a sudden halt. Experts have warned that even the threat of a debt default could spark a recession.

Seven of the 11 primary S&P 500 sectors ended in red, with consumer discretionary and communication services leading the laggards by losing 0.84 percent and 0.49 percent respectively. Energy and health led the gainers by rising 0.73 percent and 0.46 percent respectively.

The stock market could fall sharply if a deal does not go through by the deadline, Peter Cohan, associate professor of management practice at Babson College, a private business school in Massachusetts, told Xinhua News Agency.

What happened during debt ceiling talks in 2011 could repeat itself, and it could be worse, although what happened in 2011 was essentially a short-term phenomenon, he said.

The S&P 500 Index fell nearly 17 percent between July 22 and Aug 8 during the debt ceiling impasse in 2011.

As Democrats say they will not support deficit reduction to pay for tax cuts that drive back up the deficit and Republicans say they will not agree to anything that limits tax cuts, there is no basis for an agreement, David Super, professor of law and economics at Georgetown University Law Center, told Xinhua.

It is likely there will be an extension of the debt limit for about two months and that "negotiations will continue for most of the summer", he said.

The markets could be very unsettled in the short term, and the situation in the market could be worse than that during debt ceiling talks in 2011, Super said.

A default is likely to be catastrophic for the US economy, with spillover throughout the globe, and would probably spark a recession, observers say.

Treasury Secretary Janet Yellen warned last week that a national default would destroy jobs and businesses and would probably leave millions of families who rely on federal government payments unpaid, including Social Security beneficiaries, veterans and military families.

The US has had a legal debt ceiling for more than a century and has raised it more than 100 times, and though Congress has never failed to raise the ceiling, partisan battles have sometimes taken the country to the edge of default, as in 2011, Cal Jillson, a historian at Southern Methodist University in Dallas, told China Daily.

"When there is a Democrat president and the Republicans control one or both houses of Congress, as is the case now, the Republicans commonly try to leverage spending cuts," said Jillson, also a political scientist. "They are not so moved when the president is a Republican.

"If the US government were to default, meaning be unable to pay some or all of its obligations in a timely way, that certainly would detract from the government's credibility."