The United States without a New Debt Ceiling

As the deadline approaches, as well as a potential credit rating reduction, it is unclear how Democrats and Republicans will solve the debt mess that has U.S. politicians on vigil.

As to bipartisan negotiations, very few signs of progress have emerged over the last few days, even after president Obama gave legislators a final deadline for signing a plan to raise the debt ceiling.

Republicans in the House of Representatives plan to look over a proposal that calls for an increase of 2.4 billion dollars to the existing debt, which is $14.29 billion already; it is a legal action that also demands a balanced budget and cuts to government spending.

However, the majority of analysts think that this program (known in the hallways of the Capitol as the “Cut, Cap and Balance” Act) has little possibility of generating bipartisan support due to fierce opposition from conservative Republicans.

Simultaneously, the Senate will continue to work on the back-up plan or Plan B, presented by Republican congressman Mitch McConnell of Kentucky, that would allow president Obama to raise the debt limit three more times before 2012.

McConnell proposed the creation of a special legislative panel charged with the responsibility of designing gradual reductions of the deficit with a permanent or long term solution in mind against the fiscal imbalance, reported The Wall Street Journal.

Despite good intentions, McConnell’s initiative — seconded by Democrat leader Harry Reid — could be left in limbo, neutralized by the same conservative resistance that demands more cuts on government spending.

While the August 2 deadline approaches, financial circles in the United States will have their eyes on home sales figures, soon to be published, in order to assess the fragile financial recovery of the country.

Moody’s Investors Service warned recently that if the federal government defaults, it could lower the U.S. credit rating.

Similar institutions, such as Standard and Poor’s and Fitch, have also warned that they might have to lower the U.S. AAA rating.

Secretary of the Treasury Timothy Geithner and Chairman of the Board of Governors of the Federal Reserve Ben Bernanke have also warned that the U.S. could default on payments if the debt limit, which was reached last May, is not raised by August 2.

The United States has a debt ceiling that represents more than 95% of its gross domestic product. If a clear plan is not presented, distrust could induce investors to ask for higher interest rates, a move that would require an adjustment in public spending.