US deficit talks creep toward cutoff point as debtors get nervous

Jul 15, 2011, 11:11 GMT

Washington - Only one day remained for US President Barack Obama and congressional leaders to break a stalemate over how to cut the government's budget deficit, as analysts in China, the largest US creditor, expressed worries.

The White House said that the president viewed Friday as an 'important moment' to decide whether daily meetings should be continued, if the talks are moving forward toward a significant agreement.

'If we're not, then we have to begin looking at making sure that we fulfill our obligation to uphold the credit rating of the United States,' White House spokesman Jay Carney said Thursday.

It was not clear what options the White House is exploring.

Another round of talks was to be held later Thursday at the White House. Carney said that in the daily talks, all sides have agreed that default on the nation's debt was 'inconceivable.'

The debt limit stands at 14.3 trillion dollars, and Obama's Treasury officials say that without an increase by August 2 the US government will be unable to meet all its obligations, including payments to bondholders and pensioners.

Republicans have insisted on major cuts in spending, including social programmes, before raising the debt ceiling, while refusing countering demands from Obama and the Democrats for increases in tax revenue.

On Wednesday, Moody's Investors Services slightly upped its probability rating that the US government could default and said it was beginning to review the possibility of a credit downgrade.

The developments have begun to unnerve countries like China, which holds 1.15 trillion dollars of US Treasury notes, about 8 per cent of the US national debt. Yu Bin, from China's State Council Development Research Centre, recently called the US debt situation 'worrying' and said that China - as the United States' biggest creditor - must 'seriously reconsider the threatened risks.'

That would likely mean China would reshuffle it's 3.2 trillion dollars of currency reserves, which are chiefly held in US dollars.

US Treasury Secretary Tim Geithner said that 'the eyes of the world are on us.'

'We need to make sure we stand together and send a definitive signal that we are going to take the necessary steps to avoid default,' he said in broadcast remarks. 'We don't have much time. It's time to move.'

The White House said Obama has rejected a proposal by Senate Majority Leader Mitch McConnell that would increase in three installments over the coming year.

'He will not turn this into a toll booth situation because we are not a third-world country that approaches the brink of default every three or four months,' Carney said.