WORLD ECONOMIC CRISIS: Can China save Europe and the world?

NEW YORK, USA.- In the late 1980s, developed nations helped bail out Latin America and other emerging markets.


The issuance of so-called Brady bonds (named for the former Reagan/Bush-era Treasury secretary) enabled Brazil and other debt-laden countries to find a way out of the fiscal abyss.

Oh, how the tables have turned.

With Europe's credit and banking crisis seeming to get worse by the day, there are now several reports that Brazil -- as well as Russia, India and China -- may look to buy up a portion of sovereign debt from troubled European nations. You could a call it a BRIC Brady bond plan for the 21st century.

"Capital is flowing from lesser developed countries to higher per capita income countries. We are not used to that," said Jeffrey Bergstrand, a professor of finance with the Mendoza College of Business at the University of Notre Dame." But it makes sense because of the dramatic shift in global wealth."

Although China premier Wen Jiabao confirmed at a World Economic Forum meeting Wednesday that it may step up its purchase of European debt, nothing is set in stone (or BRICs if you will.)

But a rescue of Europe by some of the more rapidly growing emerging markets would be a delicious twist. And it would also be a savvy move by the leaders of the developing world.

After all, it doesn't do Brazil any good if Europe is in such a mess that it starts to buy less oil. And all those "made in China" consumer goods? Europe (and the U.S., of course) is a big importer.

"It's an ironic turn of events. But emerging market sovereign wealth funds can invest in Europe to help keep their customers afloat," said Robert Howe, CEO of Geomatrix, an Asia-focused hedge fund based in Hong Kong. "It could stop the euro zone from freezing up, which would help keep their own economies from stalling."

Europe's debt crisis: 5 things you need to know

But Howe said that while investments from Brazil, China and others could help stem the bleeding, it's not the ultimate solution.

"There isn't the capacity for all the BRICs to get together and bail out Europe," he said. "The problem is bigger than the sovereign wealth funds of Russia and China. What saves the day is the ECB and Germans blink and issue euro bonds."

The creation of a so-called euro bond, which would act as a common debt instrument much like the euro now acts as a unified currency, has been mentioned by many economists and financial experts as a possible way to help end the crisis.

A euro bond, in principle, would have lower yields than bonds for Greece, Ireland and Portugal -- the three most troubled Europe members.

If those nations could refinance some of their higher-yielding debt, that could provide much needed-relief. But stronger nations like Germany have not been keen on the idea of paying higher interest rates for their debt to subsidize Europe's weakest links.

BullHorn: Europe's Serbian savior

Still, experts said a euro bond can't be ruled out yet. China and other nations may be able to exert pressure on Europe to get its fiscal house in order as a condition for investments.

And keeping potential purchasers of their goods and services financially flush wouldn't be the only motivation for the developing nations to buy up bonds of European nations.

It would also give emerging markets a way to spice up some of their foreign debt holdings and move away from the low-yielding United States. China, in particular, has voiced some displeasure about how the uncertain economic environment in the U.S. has devalued the dollar and U.S. Treasury bonds.

As of July, China held $1.17 trillion worth of Treasuries. The remaining three BRIC nations held a collective $356 billion. The yield on the 10-year is now a paltry 2%. Euro debt, while obviously much riskier, could offer these countries more bang for their real, ruble, rupee and renminbi.
"It's no secret that emerging economies want to diversify beyond the U.S. But the question is what are they willing to buy and what are they willing to pay for it," said Steven Huber, manager of the T. Rowe Price Strategic Income Fund (PRSNX) in Baltimore.

But is it really that simple? If the BRICs just bought Greek and Italian debt, would that really help stabilize Europe and boost potential returns in their own fixed-income portfolios?

Bergstrand thinks so. He said developed markets are more worried about another Lehman-like event hurting them and that's why they realize they have to do something. Adding higher-yielding bonds may be an added benefit but it will not be the driving factor behind a decision to act.

"Buying euro debt would not be a Machiavellian move," he said. "It is in the best interest of the developing world for Western Europe to do well."
Is default the next Greek tragedy?

But Aaron Gurwitz, chief investment officer at Barclays Wealth in New York, said he wasn't sure if China or other emerging market countries really wanted to make a bold bet on all of Europe. He said that it may be safer to buy more German bonds, as opposed to debt from the PIIGS.

Gurwitz said that if China was truly sincere in wanting to assist Europe, there's another way to do so.

It could let the renminbi, or yuan as its more commonly known, float more freely on the global financial markets. China has been criticized for keeping the yuan artificially low to make Chinese-made goods cheaper.

"What I really wish the Chinese would do is stop buying so many foreign bonds and just let its currency appreciate a bit," he said."That would allow the Europeans and U.S. to export more to China, and that could help the global economy."

That may be asking for a bit much. It is becoming increasingly clear that the gap between the developing and developed markets is continuing to narrow -- and the emerging markets are dealing more from a position of strength than ever before.


Chinese Premier says country cannot grow in isolation



Premier Wen will soon step down from his role, and is paving the way for his successor
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Chinese Premier Wen Jiabao has said the country cannot grow in an isolated way, and it will look to develop global and domestic growth.

He added that more open economic and trade policies would help it and the wider world.

Premier Wen said that he was confident the US and Europe would fully recover fro their current economic problems.

His comments came on the opening day of the World Economic Forum in the Chinese port city of Dalian.

Global player

China is the world's second-biggest economy but it has been criticised for some of its economic policies.

The US has been one of its most vocal critics, and the two have clashed over China's trade and currency measures.

China has been accused of focusing too much on driving export demand and keeping its currency artificially weak to achieve that end.

In his speech on Wednesday, Premier Wen said that China would now aim to boost domestic demand, and this in turn would help the global economy.

"I am confident that China's economy will make a new contribution to robust, sustainable and balanced growth in the global economy," Premier Wen said.

Debt risk

The BBC's Juliana Liu is at the World Economic Forum in Dalian and said that while Wen Jiabao was full of confidence about the state of the global economy, many of the delegates did not share that optimism. 

“ We have on many occasions expressed ...a readiness to increase our investment in Europe” (Wen Jiabao, Chinese Premier)

Instead they were worried that any US economic recovery would be slow, while the European Union would struggle to resolve its debt crisis.

Leaders from Germany, France and Greece are set to talk Wednesday amid ongoing worries that Greece may default on its sovereign debt.

That could send shockwaves through other European economies and damage the region's banking system.

"There is a sense that the EU and US debt crises will roll on," she said.

But Premier Wen did say that China is willing to invest more in European countries, and asked them to recognise China as a market economy.

"We have on many occasions expressed our readiness to extend a helping hand and a readiness to increase our investment in Europe," he said in his speech.

CRISIS DE LA DEUDA DE EE.UU: Wall Street cerró con caída de más de 5% tras rebaja en calificación de deuda

Wall Street cerró con caída de más de 5% tras rebaja en calificación de deuda de EEUU

El principal indicador bursátil de Estados Unidos, el promedio industrial Dow Jones, retrocedió 5,55% a 10.809,85 puntos, mientras en Europa el FTSEurofirst 300, de las acciones líderes, cerró con una caída de 3,4% a 942,15 unidades, su mínimo desde agosto de 2009.
Bolsas de Frankfurt y París registraron las mayores pérdidas en mercados europeos Oro se disparó y cerró por primera vez sobre US$1.700 por incertidumbre mundial Petróleo cerró con caída de 6,4% en EEUU y se ubicó en su menor nivel desde fines de 2010 Cobre cerró con pérdidas arrastrado por temor de desaceleración económica global Los principales mercados internacionales se desplomaron este lunes luego que la agencia calificadora Standard & Poor's recortó la nota de crédito máxima de AAA de Estados Unidos, lo que aumentó la preocupación de los inversionistas respecto al desempeño de la mayor economía del mundo y los llevó a desprenderse de los activos más riesgosos como las acciones.

El principal indicador bursátil de Estados Unidos, el promedio industrial Dow Jones, retrocedió 5,55% a 10.809,85 puntos, mientras el Standard & Poor's 500 perdió 6,66% para cerrar en 1.119,46 unidades y Nasdaq Composite bajó 6,9% a 2.357,69 puntos.

Una ola de ventas en pánico elevó el volumen de las operaciones en la Bolsa de Nueva York y el Standard & Poor's 50 registró su peor día desde diciembre del 2008.

En Europa el FTSEurofirst 300, de las acciones líderes, cerró con una caída de 3,4% a 942,15 unidades, su mínimo desde agosto de 2009.

La decisión de la agencia se produjo tarde el viernes tras una semana inestable para las bolsas -la peor en más de dos años-, porque los temores por las débiles perspectivas económicas y el fuerte endeudamiento público que pesan sobre las economías desarrolladas afectaron la confianza de los mercados.

El movimiento de los inversionistas hacia activos seguros impulsó al oro a un nuevo récord de US$1.713,2 por onza, porque los agentes se mostraron escépticos frente a los compromisos de los líderes de las mayores economía del mundo y del Banco Central Europeo para respaldar los mercados.

El Banco Central Europeo compró bonos emitidos por Italia y España, dos países de la zona euro con graves problemas fiscales, pero la acción no logró evitar del desplome de las bolsas.

"Lo que nos preocupa y hace que no entremos al mercado ni siquiera para comprar lo que vemos como valioso es que la presión hacia una mayor caída es aún muy fuerte", dijo Paul Zemsky, jefe de administración de activos de ING en Nueva York.

La agencia Standard & Poor's bajó la calificación de Estados Unidos a 'AA+' desde 'AAA'.

"No pasará mucho tiempo antes de que otras agencias sigan ese camino, considerando el estado de las finanzas estadounidenses. Una cosa es segura, la volatilidad seguirá y se hará más difícil operar en el mercado", dijo Angus Campbell, jefe de ventas de Capital Spreads.

Moody's repitió el lunes la advertencia de que puede bajar la calificación de Estados Unidos antes del 2013 si el panorama económico se deteriora significativamente, pero ve posibilidades de un nuevo acuerdo en Washington para reducir el déficit fiscal antes de esa fecha.

El negativo escenario externo también afectó los precios de las materias primas, ante la expectativa que un menor crecimiento económico mundial pueda impactar la demanda por estos productos.

El precio del petróleo cayó 6,41% a US$81,31 el barril, en la Bolsa Mercantil de Nueva York, mientras el cobre cerró con un descenso de 1,64% a US$4,10 la libra, en la Bolsa de Metales de Londres, marcando su menor valor en cinco semanas.

Obama por rebaja de S&P: "No importa lo que ocurra siempre seremos un país AAA"

El presidente de EEUU atribuyó el recorte de su calificación crediticia al enfrentamiento político en Washington, por lo que sostuvo que ofrecerá algunas recomendaciones sobre cómo reducir el déficit fiscal del país.

Morgan Stanley advierte que impacto de rebaja en calificación a EEUU podría no ser inmediato Moody's reitera que podría bajar calificación de EEUU antes de 2013 si se deteriora panorama económico S&P asegura que hay un 33% de probabilidades de una nueva rebaja a EEUU El presidente Barack Obama afirmó hoy que "los mercados siguen percibiendo que el crédito de Estados Unidos es de primera categoría" y que los actuales problemas financieros "tienen solución".

El presidente, en una alocución desde la Casa Blanca mientras continuaba la caída de las cotizaciones en los mercados financieros en respuesta a la rebaja de la calificación del crédito del país por parte de la agencia Standard & Poor's, sostuvo que a los inversionistas les preocupa "la incapacidad política para hallar esas soluciones".

"Los mercados suben y bajan pero este es Estados Unidos, y no importa lo que ocurra siempre seremos un país AAA", añadió.

"Tenemos los trabajadores más productivos, la tecnología más avanzada, los empresarios con más iniciativa", continuó.

El presidente reiteró que la solución a mediano y largo plazo requiere un "manejo equilibrado" del déficit de Estados Unidos que incluya reducciones de los gastos y aumentos de los impuestos.

De hecho, Obama atribuyó el recorte de su calificación crediticia al enfrentamiento político en Washington, por lo que sostuvo que ofrecerá algunas recomendaciones sobre cómo reducir el déficit fiscal del país.

Agregó que espera que la rebaja de S&P dé a los legisladores un nuevo sentido de urgencia para enfrentar el déficit y sostuvo que no creía que los recortes pudiesen avanzar solo con un recorte de gastos.

Por ello mencionó nuevamente la necesidad de subir los impuestos a los estadounidenses más ricos y hacer ajustes modestos en los populares pero costosos programas de bienestar social.

U.S. RATING DOWNGRADE: Stocks on key Asian exchanges dropped early Monday on what is likely to be an eventful day in world markets

Asian stocks dip after U.S. credit downgradeBy the CNN Wire StaffAugust 7, 2011 9:47 p.m. EDT




Asia markets open after U.S. downgradeSTORY HIGHLIGHTS

NEW: Losses are modest in Tokyo, Seoul and Sydney

Investors are weighing both the downgrade and the European debt crisis

G-7 leaders say they are committed to taking "all necessary measures"

U.S. stock futures tumble around 1.5% in early electronic trading

Stocks on key Asian exchanges dropped early Monday on what is likely to be an eventful day in world markets, following Standard and Poor's downgrade of U.S. debt.

In the first hour of Tokyo trading, the Nikkei index fell 112 points, or 1.2%.

Korea's KOSPI index slipped 1.2%. In Australia, the All Ordinaries index lost 1.1%.

Similarly, U.S. stock futures tumbled around 1.5% in early electronic trading Sunday.

Australian markets lower at open

Markets react to ratings cuts in the U.S.

 Standard & Poor's and Financial Markets

The futures were the first gauge of investor sentiment following Friday night's downgrade, removing the United States' AAA status for the first time. They give an indication of how investors will react when regular-hours U.S. trading begins at 9:30 a.m. ET Monday.

Besides the U.S. downgrade, investors are worried about the debt crisis in some European nations.

Sunday evening, financial representatives of leading industrial nations said that they are committed to taking "all necessary measures to support financial stability and growth in a spirit of close cooperation and confidence."

They welcomed the "decisive actions taken in the US and Europe" and "the additional policy measures announced by Italy and Spain to strengthen fiscal discipline and underpin the recovery in economic activity and job creation."

"We are committed to taking coordinated action where needed, to ensuring liquidity, and to supporting financial market functioning, financial stability and economic growth," G-7 finance ministers and central bank governors said in a statement.

Treasury Secretary Tim Geithner had been expected to take part in a conference call with representatives of the other G-7 nations to discuss the downgraded U.S. credit rating, a G-7 official told CNN.

The G-7 nations are the United Kingdom, France, Germany, Italy, Japan, Canada and the United States.

Middle Eastern markets, the first to open since the downgrade, were sharply lower on Sunday. Israel's market temporarily halted trading at one point and finished down more than 6%, while the Dubai Financial Market General Index fell 3.7%.

The General Index on the Abu Dhabi Securities Exchange was down more than 2.5%, while in Saudi Arabia, the Tadawul All-Share Index dropped nearly 5.5% in trading Saturday.

Forbes: S&P downgrade is 'outrageous'

Why not to panic after S&P downgrade U.S. officials are talking to a "wide range of investors" about the downgrade by the credit agency to try to "mitigate" any short-term negative impact from Friday's announcement, a Treasury official told.

Top Standard & Poor's officials said Sunday that the downgraded credit rating for the United States was both a call for political consensus on significant deficit reduction and a warning of possible further credit problems down the road.

"We have a negative outlook on the rating and that means that we think the risks currently on the rating are to the downside," said David Beers, the S&P global head of sovereign ratings, on "Fox News Sunday."

However, Beers said markets were reacting to the debt crises in some European countries and fears of a global economic slump, rather than the U.S. credit downgrade alone.

The European Central Bank, in a bid to calm markets, said on Sunday it would implement a bond-purchase program and welcomed the announcements by Italy and Spain on new measures meant to reduce their deficits. It told the governments of those countries that a "decisive and swift implementation" of reforms is "essential."

The move represents an escalation in the official response to Europe's debt crisis, which is now more than a year old and until recently was contained to smaller economies like Greece, Ireland and Portugal.

John Chambers, the S&P head of sovereign ratings, told ABC's "This Week" program Saturday that it could take years for the United States to return to AAA status.

"Well, if history is a guide, it could take a while," Chambers said. "We've had five governments that lost their AAA that got it back. The amount of time that it took for those five range from nine years to 18 years, so it takes a while."

The agency's concerns "are centered on the political side and on the fiscal side," Chambers said.

"So it would take a stabilization of the debt as a share of the economy and eventual decline," he said. "And it would take, I think, more ability to reach consensus in Washington than what we're observing now."

Both Beers and Bill Miller, chairman and chief investment officer at Legg Mason Capital Management, told the Fox program that they don't expect the U.S. downgrade to cause a spike in interest rates, one of the possible results of the higher risk now attached to U.S. debt.

"I don't think we'll pay more in interest," Miller said, calling the downgrade more of a symbolic event than an economic event. However, he warned of continuing market volatility in coming days driven by uncertainty.

Rating agencies such as S&P, Moody's and Fitch analyze risk and give debt a grade that is supposed to reflect the borrower's ability to repay its loans. The safest bets are stamped AAA. That's where the U.S. debt has stood for years.

Moody's first assigned the United States an AAA rating in 1917. Fitch and Moody's, the other two main credit ratings agencies, maintained the AAA rating for the United States after last week's debt deal, though Moody's lowered its outlook on U.S. debt to "negative."

A negative outlook indicates the possibility that Moody's could downgrade the country's sovereign credit rating within a year or two.

U.S. Treasury officials received S&P's analysis Friday afternoon and alerted the agency to an error that inflated U.S. deficits by $2 trillion, said an administration official, who was not authorized to speak for attribution. The agency acknowledged the mistake, but said it was sticking with its decision.

The administration official called it "a facts-be-damned decision ... Their analysis was way off, but they wouldn't budge."

Saturday, Gene Sperling, director of Obama's National Economic Council, criticized S&P's call.

"The magnitude of their error and the amateurism it displayed, combined with their willingness to simply change on the spot their lead rationale in their press release once the error was pointed out, was breathtaking. It smacked of an institution starting with a conclusion and shaping any arguments to fit it," he said.

But Beers defended his agency's move on Sunday, telling the Fox program: "The underlying debt burden of the U.S. government is rising and will continue to rise over the next decade."

European finance officials are stepping up their efforts to slow the rising panic over the euro zone's debt crisis.


The European Central Bank signaled in a statement on Sunday that it was ready to begin buying Italian and Spanish government bonds.

Both countries -- two of the largest economies in Europe -- have been under pressure to speed up budget reforms as investors have demanded higher interest rates for loans.

The move represents an escalation in the official response to Europe's debt crisis, which is now more than a year old and until recently was contained to smaller economies like Greece, Ireland and Portugal.

In a separate announcement Sunday, finance ministers from the G-7 -- a group of significant world economies -- pledged support for troubled countries.

"In the face of renewed strains on financial markets, we ... affirm our commitment to take all necessary measures to support financial stability and growth in a spirit of close cooperation and confidence," the G-7 statement read.

The world's largest economies -- and fastest growing

Investors lending money to Italy and Spain have been demanding higher interest rates, now north of 5.5%, while Greek bonds carry a 15% rate. (More on what's wrong with Italy)

Coupled with weak growth, the sharp increase in interest rates only adds to the countries' debt and makes it even more difficult for them to dig out of their holes.

The high government debt loads threaten to trap countries in a vicious cycle: The debt weighs on economic growth -- and austerity measures aimed at attacking the debt only put a further drag on their economies.

In recent days, European leaders have been scrambling to figure out solutions.

Details of the ECB plans to buy Italian and Spanish bonds were not immediately clear.

But analysts at Barclays Capital Research said the move, coming in addition to efforts the countries are making to get their budgets in better shape, should help calm markets.

"It carries the clear hint that the ECB is ready to purchase debt on its own book if needed, should it consider markets dysfunctional and so interfering with monetary policy transmission," Barclays analysts wrote in a note Sunday.

Market correction looks bearish

Europe has been criticized as slow to respond to its debt crisis.

Last month, leaders agreed to a new 109 billion euro aid package for Greece and proposed an expansion of the European Financial Stability Fund -- a controversial bailout program established last year.

The stability fund's powers, which has so far disbursed money to Ireland and Portugal, will be greatly expanded under the new plan.

The 440 billion euro fund will have the authority to buy sovereign debt in the secondary market, meaning it could absorb discounted government bonds from banks and investors.

It will also be able to provide lines of credit to shore up banks in troubled euro zone nations, even ones that do not have currently get help from the program, such as Italy and Spain.

But the stability fund's expansion has yet to be completed.

In its statement on Sunday, the ECB said that "governments stand ready" to activate the fund "once [it] is operational."

U.S. DEBT TALKS focus on a new bipartisan $3.7 trillion debt reduction plan Wednesday -- the latest effort to avoid a potentially catastrophic default next month

Washington – Top administration and congressional officials are expected to focus on a new bipartisan $3.7 trillion debt reduction plan Wednesday -- the latest effort to avoid a potentially catastrophic default next month on the federal government's financial obligations.


President Barack Obama offered strong praise for the initiative on Tuesday, calling it "broadly consistent" with his own approach to the current debt ceiling crisis because it mixes tax changes, entitlement reforms and spending reductions.

Senate Democratic leaders, however, expressed skepticism that they will be able to increase the debt limit and pass the plan -- drafted by members of the chamber's so-called "Gang of Six" -- by the August 2 deadline.

If Congress fails to raise the current $14.3 trillion debt ceiling by that date, Americans could face rising interest rates, a declining dollar and increasingly jittery financial markets, among other problems.

The seriousness of the overall situation was reinforced last week when a major credit rating agency, Standard and Poor's, said it was placing the United States' sovereign rating on "CreditWatch with negative implications." Another major agency -- Moody's Investors Services -- said it would put America's bond rating on review for a possible downgrade.

House Republicans approved a "cut, cap and balance" plan Tuesday night that would raise the debt ceiling while imposing strict caps on all future federal spending and making it significantly tougher to raise taxes -- the solution favored by hard-line conservatives. The GOP plan -- which also requires Congress to pass a balanced budget amendment to the Constitution before raising the debt ceiling -- has little chance of clearing the Democratic-controlled Senate or surviving a certain presidential veto.


The vote did, however, allow rank-and-file Republicans to clearly demonstrate their preference for steps favored by many in the tea party movement even as their leadership seeks a middle ground with Democrats.

"While President Obama simply talks tough about cutting spending, House Republicans are taking action," House Speaker John Boehner, R-Ohio, said in a statement after the sharply polarized 234-190 vote.

Obama said before the vote that legislators "don't have any more time to engage in symbolic gestures."

"We have a Democratic president and administration that is prepared to sign a tough package that includes both spending cuts (and) modifications to Social Security, Medicaid and Medicare that would strengthen those systems and allow them to move forward, and would include a revenue component," Obama added. "We now have a bipartisan group of senators who agree with that balanced approach. And we've got the American people who agree with that balanced approach."

Obama also refused to rule out a fallback plan proposed by Senate Minority Leader Mitch McConnell, R-Kentucky, that would raise the debt ceiling up to $2.5 trillion through the 2012 election.

Under the Gang of Six plan -- put together by three Democrats and three Republicans -- $500 billion in budget savings would be immediately imposed, with marginal income tax rates reduced and the controversial alternative minimum tax ultimately abolished.

The plan would create three tax brackets with rates from 8% to 12%, 14% to 22%, and 23% to 29% -- part of a new structure designed to generate an additional $1 trillion in revenue. It would require cost changes to Medicare's growth rate formula, as well as $80 billion in Pentagon cuts.

"We've gone from a Gang of Six to a Mob of 50," an upbeat Sen. Joe Manchin, D-West Virginia, told reporters as he left a Tuesday meeting on Capitol Hill where other senators were briefed on the blueprint.

Sen. Tom Coburn, R-Oklahoma, announced that he had decided to rejoin the group. Coburn had recently withdrawn from the Gang of Six due to a dispute over entitlement cuts, but declared Tuesday that the plan, which now includes $116 billion in entitlement health care cost savings, has "moved significantly, and (is) where we need to be."

A Democratic congressional source said on condition of not being identified that the private meeting with senators to unveil the plan erupted in applause when Coburn, a conservative deficit hawk, announced he had rejoined the Gang of Six.

Other legislators supporting the plan included two conservative Republicans -- Sen. Lamar Alexander of Tennessee and Rep. Roger Wicker of Mississippi -- while another GOP conservative, Sen. Jeff Sessions of Alabama, raised questions about whether it achieves necessary spending cuts and raises taxes.

A spokesman for Boehner said it was similar in concept to what Boehner and Obama had discussed in their negotiations so far, "but also appears to fall short in some important areas." Other House Republican leaders, including Majority Leader Eric Cantor of Virginia and Budget Committee Chairman Rep. Paul Ryan of Wisconsin, also questioned the Gang of Six plan's call for increased tax revenue and commitment to reducing future costs.

Senate Majority Leader Harry Reid, D-Nevada, meanwhile, noted that the Constitution requires revenue bills to originate in the House, while his assistant majority leader, Sen. Dick Durbin of Illinois, pointed out that the plan still must be drafted into legislative language and analyzed by the Congressional Budget Office before it can be considered.

"It's not ready for prime time," said Durbin, one of the Gang of Six negotiators.

Reid said he's open to incorporating some elements of the proposal into a separate bill that he and McConnell are drafting as a fallback option to prevent the U.S. government from defaulting on its debt.

Several new public opinion polls, meanwhile, show that a majority of Americans want legislators to compromise on a deficit reduction deal instead of refusing to yield from their starting positions.

A CBS News poll released Monday indicates that two-thirds of Americans say any agreement should include spending reductions and tax hikes, with 28% saying a deal should only include spending cuts and 3% saying it should only include tax increases.

According to the survey, there is little partisan divide on the question. More than seven out of 10 Democrats and more than two-thirds of independent voters support a balanced approach, as do 55% of Republicans and 53% of self-described tea party movement supporters.


A Quinnipiac University poll released last week had similar findings. The survey indicated that two-thirds of the public supported a deal that included spending cuts as well as tax increases for wealthy Americans and corporations. Nearly nine out of 10 Democrats and two-thirds of independents in the survey supported the inclusion of tax increases, with Republicans divided on the issue.

The GOP initiative -- which would require any new tax increases to be approved by two-thirds of the members of the House and Senate -- stands in sharp contrast to Obama's stated preference for a package of roughly $4 trillion in savings over the next decade, composed of tax increases on the wealthy and spending reforms in Medicare, Social Security and elsewhere.

Hopes for such a so-called "grand bargain" appeared to have faded in recent days, partly because Republicans have continued to insist that any tax increases could derail an already shaky economic recovery. It was not immediately clear whether the Gang of Six proposal would be able to revive those hopes.

At the heart of the tax dispute has been Obama's call for more revenue by allowing tax cuts from the Bush presidency to expire at the end of 2012 for families making more than $250,000. The president's ideal plan would keep the lower tax rates for Americans who earn less.

Obama noted last week he is not looking to raise any taxes until 2013 or later. In exchange, the president said, he wants to ensure that the current progressive nature of the tax code is maintained, with higher-income Americans assessed higher tax rates.

But resistance to higher taxes is now a bedrock principle for most Republicans, enforced by conservative crusaders such as political activist Grover Norquist. His group, Americans for Tax Reform, has sponsored a high-profile pledge to oppose any tax increase.

The pledge has been signed by more than 230 House members and 40 senators, almost all of them Republicans.

Despite their differences, leaders from both parties insist they are committed to reaching an agreement that will allow them to raise the debt ceiling before August 2. McConnell's fallback proposal would give Obama the power to raise the borrowing limit by a total of $2.5 trillion, but also require three congressional votes on the issue before the 2012 general election.

Specifically, Obama would be required to submit three requests for debt ceiling hikes -- a $700 billion increase and two $900 billion increases. Along with each request, the president would have to submit a list of recommended spending cuts exceeding the debt ceiling increase. The cuts would not need to be enacted in order for the ceiling to rise.

Congress would vote on -- and presumably pass -- "resolutions of disapproval" for each request. Obama would likely veto each resolution. Unless Congress manages to override the president's vetoes -- considered highly unlikely -- the debt ceiling would increase.

The unusual scheme would allow most Republicans and some more conservative Democrats to vote against any debt ceiling hike while still allowing it to clear.

McConnell and Reid are also working on two critical additions to the plan, according to congressional aides in both parties. One would add up to roughly $1.5 trillion in spending cuts agreed to in earlier talks led by Vice President Joe Biden; the other would create a commission meant to find more major spending cuts, tax increases and entitlement reforms.

Changes agreed to by the commission -- composed of an equal number of House and Senate Democrats and Republicans -- would be subject to a strict up-or-down vote by Congress. No amendments would be allowed.

Sources say the panel would be modeled after the Base Closing and Realignment Commission, which managed to close hundreds of military bases that Congress could not otherwise bring itself to shut down.

U.S. DEBT TALKS: Why The Debt Limit Ought to Worry Canadians Too

If you have been following the U.S. debt-limit negotiations, you will undoubtedly have heard U.S. Treasury Secretary Timothy Geithner’s repeated warnings that failure to raise the debt limit would have catastrophic consequences for the U.S. economy: The credit rating of the United States would be downgraded, interest rates would rise, the safety and security of the dollar would be questioned, and the American economy would plunge back into a deep recession.


Yet, readers might be interested to learn that the effect of not raising the debt limit could have a nasty impact on the Canadian economy as well – perhaps worse than what followed the recent financial crisis. After all, the Canadian economy is inextricably linked to that of its southern neighbour, and bad economic news for the United States can spell bad news for Canada.

In light of this, Canadian Finance Minister Jim Flaherty says: “As the largest economy in the world and Canada’s largest trading partner, we are closely following the current political impasse in the U.S. … Clearly, we believe the situation needs to be addressed in the very near future to ensure continued confidence in the American and global economy.The debt limit is a cap that Congress imposes on the amount the federal government can borrow. To be clear, raising the debt limit wouldn’t actually increase the level of debt. Rather, debt grows because of taxing and spending decisions that Congress makes separately in the budget process. Raising the debt limit simply allows the government to finance spending that Congress has already approved. Failure to raise the debt limit would make it impossible for the federal government to pay for everything it has already authorized. Furthermore, if the limit is not raised, the government will eventually be forced to default on some obligation, whether that means missed payments to government contractors, or late Social Security checks to old-age retirees.

Economists tend to agree that failing to raise the debt limit will cause U.S. interest rates to spike, as investors will demand higher yields to lend to the United States. But, if recent history is any guide, a sharp increase in U.S. interest rates would mean a commensurate increase in Canadian interest rates, as well. That could have a rather pernicious effect on the debt burdens of Canadian households that have accumulated high levels of debt over the past several years. Small business loans, mortgages, and other forms of credit would become costlier, weakening consumers’ spending power and businesses’ ability to expand and hire new employees.

Combine the effect of a sharp interest-rate hike with a slowdown in Canada’s largest trading partner, and the negative economic effect of failing to raise the debt limit grows significantly. Canadian exporters would inevitably see decreased demand from sluggish American businesses and strapped consumers, and the loss in value of the U.S. dollar would make Canadian goods more expensive.

To complicate matters even further, if the failure to raise the debt limit caused a sell-off of U.S. Treasuries, a global financial crisis could ensue. For many, Treasuries appear to be a safe-harbour asset; investors hold them because they believe such investments are secure and sellable. Thus, a large sell-off of Treasury bonds could leave institutions flat-footed. Consider what might happen to insurance companies, as well as mutual and pension funds, that together hold over a trillion dollars’ worth of Treasury bonds. If they are unable to sell their rapidly depreciating Treasury holdings, they may be unable to raise enough money to pay for insurance payouts or redemptions. It is hard to see how Canada’s financial institutions and economy could be spared in such a scenario.

To be fair, it is possible that the Canadian economy could sail through such a downturn. But, given the economic decline that Canada felt during the recent financial crisis that originated in the U.S., it doesn’t seem likely.

The unprecedented nature of this issue makes it difficult to know exactly what might happen if Congress fails to raise the debt limit, but it seems likely that the results would not be in the best interests of the American people, and that Canadians, as their neighbours, would be similarly ill-affected.