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World holds breath as US stays debt-locked

business Updated: Jul 26, 2011 21:54 IST

Reuters
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The United States edged closer on Tuesday to a devastating default as Republicans and Democrats remained deadlocked over competing plans to raise the debt ceiling, one week before a deadline to act.

With no compromise in sight and the threat of a far-reaching US credit downgrade looming, IMF chief Christine Lagarde urged swift resolution of the political impasse in Washington, warning that failure to reach an agreement would have serious consequences for the world economy.

US President Barack Obama, in a televised address aimed at rallying public support for a package proposed by Democrats, warned that failure to increase the US borrowing limit would severely hurt the nation. “For the first time in history, our country’s triple-A credit rating would be downgraded, leaving investors around the world to wonder whether the United States is still a good bet,” he said in remarks in the East Room on Monday night.

Republican and Democratic lawmakers, despite weeks of intense talks, have been unable to agree on how to lift the $14.3 trillion debt limit by an August 2 deadline, when the country runs out of cash to pays its bills.

Markets have been rattled by the descent of negotiations into an acrimonious stalemate, with both sides offering competing plans that are unlikely to win bipartisan support.

Gold has been pushed to an all-time high and the dollar has softened as investors weigh the harm a default could do to US and world growth if it pushed up borrowing costs as expected.

Obama warned a default would inflict a tax hike on all Americans by pushing up borrowing costs on things like credit card loans and mortgages, but sought to assure markets a deal could still be reached.

“I have told leaders of both parties that they must come up with a fair compromise in the next few days that can pass both houses of Congress — a compromise I can sign,” he said. Reuters