Debt ceiling talks between Obama and Republicans collapse

Debt ceiling talks between Barack Obama and John Boehner have broken down, throwing the US into economic uncertainty. Photograph: Manuel Balce Ceneta/AP

The US is on the brink of a major economic crisis after negotiations between Barack Obama and Republican Congressional leaders over the national debt dramatically broke down on Friday.

Obama, showing anger, passion and verbosity rare in public in his two-and-a-half years as president, called a press conference at the White House at short notice to express his frustration with the Republicans.

He told reporters there had been "a breakdown in trust" between the White House and the Republican leadership. In a snub to the president, the Republican leader in the House, John Boehner, failed to return calls from the White House throughout the day, with his office saying he was unavailable. Boehner finally called the president on Friday evening to inform him the Republicans were walking away from weeks of negotiation aimed at resolving the country's debt crisis.

The collapse in talks comes with 10 days left until the US, for the first time in its history, faces the prospect of defaulting. If it fails to raise its $14.3tn (?8.7tn) borrowing ceiling, there will be serious consequences for not only the US economy but other countries around the world.

The Republican withdrawal came just a day after Obama and Boehner had seemed close to an agreement on the broad outlines of a package to cut $3tn in federal spending over the next 10 years, and to raise some taxes. But Boehner was unable to sell it to diehard Republicans in the House, many of whom were elected last year with the support of the Tea party movement, which seeks deep cuts in spending but no tax rises.

In a letter published just minutes after Obama began to speak, Boehner said: "In the end, we couldn't connect. Not because of different personalities, but because of different visions for our country." He blamed Obama for failing to agree to deep cuts in social security and other welfare benefits and for demanding that taxes be raised. "For these reasons, I have decided to end discussions with the White House," Boehner said.

An exasperated Obama called Democratic and Republican Congressional leaders to meet at the White House at 11 o'clock on Saturday morning to offer alternative proposals for dealing with the looming deadline on the debt ceiling.

The president insisted that the debt ceiling had to be raised or Americans across the country would suffer. "We've got to get it done. It is not an option not to do it," he said. If there is no deal, he said, he could not guarantee that the 70 million cheques due to go out to social security recipients, veterans and others on 3 August, the day after the deadline, would be sent.

The US chamber of commerce expressed nervousness over the prospect of America's credit rating being downgraded.

Federal payments to state governments could also be hit. State governors are laying down emergency plans, with California, among others, looking for alternative sources of borrowing to tide it over. Banks and businesses are also working feverishly preparing for worst-case scenarios.

The crisis is the biggest test of wills yet between Obama and hardline Republicans endorsed by the Tea party movement. It dwarfs the stand-off earlier this year when the federal government faced shutdown.

According to the Treasury, America reached its borrowing limit of $14.3tn on 16 May but is able to keep servicing its debts until 2 August.

Mark Blyth, professor of politics at Brown University and author of the forthcoming book Austerity: The History of a Dangerous Idea, said no one knew what the impact of defaulting would be because the situation was unprecedented.

He said the US had a long-term, serious problem, given its enormous fiscal gap and dependence on China, which has been bailing the US out and which has twice expressed concern about the impact of the default crisis on its investments. The US economy "is like Wile E Coyote who runs off the cliff and it takes him a while to realise it. What has been keeping him up is Chinese blowing air up," Blyth said.

Obama, up for re-election in November next year, has seen a sharp decline in his popularity because of the sluggishness of the US recovery from recession, with unemployment frustratingly failing to budge from just over 9%.

In spite of the negative ratings on his handling of the economy, he is doing better on the deficit issue, according to polls, with many independents, the voters who usually decide elections, blaming the Republicans and preferring a mix of spending cuts and tax increases rather than spending cuts alone.

Credit ratings agencies such as Moody's and Standard & Poor's have put the US on notice that its triple-A rating could be downgraded, which would be a national humiliation.

A glimpse into what might happen was provided by Minnesota earlier this month, when the state had to close down, with disruption reaching even minor elements of daily life, from beer supplies to adoption papers.

Ross Baker, professor of politics at Rutgers University, compared the US economy, with its huge debt, to a patient who needs both first aid and long-term care.

"The Democrats are the first-aid squad with their concern over the lack of money to stimulate the economy and produce jobs. The Republicans are in charge of the long-term care facility with their preoccupation with multi-generational debt levels," Baker said.

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Barack Obama meets the Dalai Lama at the White House

President Barack Obama has held a White House meeting with the Dalai Lama. Photograph: Jacquelyn Martin/AP

President Barack Obama held a White House meeting with the Dalai Lama, a fellow Nobel Peace Prize laureate, hours after China called on the US to rescind an invitation that could sour relations with Beijing.

The Tibetan spiritual leader has been in Washington for an 11-day Buddhist ritual. Thousands of expatriate Tibetans joined a 76th birthday celebration Wednesday for the Dalai Lama, who recently relinquished leadership of Tibet's government-in-exile.

The White House said that during the 45-minute private session in the Map Room, Obama "underscored the importance of the protection of human rights of Tibetans in China." In a statement issued after the meeting, the White House also said Obama reiterated his support for the preservation of Tibet's religious, cultural and linguistic traditions.

Obama restated US policy that it does not support Tibetan independence, a goal that the Dalai Lama said he also does not seek.

In a nod to the criticism from Beijing, Obama also stressed to the Dalai Lama that he considers a cooperative relationship between the United States and China to be important, according to the White House statement.

In remarks after the meeting forwarded by Kate Saunders from the International Campaign for Tibet, the Dalai Lama said of his visit with Obama: "Firstly we developed a very close sort of feeling for each other." He said Obama expressed his concern over basic human values, such as human rights and religious freedoms. "So naturally he shows genuine concern about suffering in Tibet and other places."

A Chinese crackdown led the Dalai Lama to flee into exile in India in 1959. China says he's welcome to return if he drops his separatist activities, accepts Tibet as an inalienable part of China and recognizes Taiwan as a province of China.

Hours before the Dalai Lama's arrival, the Chinese Foreign Ministry urged the White House to cancel the visit.

"We firmly oppose any foreign official to meet with the Dalai Lama in any form," Foreign Ministry spokesman Hong Lei said in a statement posted on the ministry's website.

"We request the US side to honour its serious commitment that recognizes Tibet as part of China and opposes Tibet independence," Hong said.

The White House kept the meeting low-key, closing it from news reporters and photographers. It chose the Map Room for the visit instead of the Oval Office, which is reserved for visiting heads of state.

The visit comes less than 10 days before US Secretary of State Hillary Rodham Clinton is expected to visit the southern Chinese city of Shenzhen. Vice President Joseph Biden is also scheduled to visit China this summer, followed by a trip to Washington by his Chinese counterpart, Xi Jinping.

Obama had been criticized by pro-Tibetan activists for putting off an invitation during the Dalai Lama's stay in the capital. White House officials said the president's schedule had been occupied with debt-limit negotiations with congressional leaders.

Obama last met the Dalai Lama in February 2010.

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US debt crisis: Obama warns of 'tax rise for all' if deal cannot be done

US President Barack Obama during a press conference on the debt ceiling in which he said Republican proposals for a budget deal without tax increases were not credible. Photograph: Mandel Ngan/AFP/Getty Images

Barack Obama has warned that the US is "running out of time" to raise the limit on US government borrowing and that failure to do so will lead in effect to a tax increase for all Americans, because a downgrade of the country's credit rating would cause an interest rate rise.

The president's warning was reinforced by a threat from the ratings agency Standard & Poor's to strip the US of its AAA standing if no long-term political deal is reached to tackle government spending and debt.

As Obama and Republican leaders in Congress continued to wrangle over the terms for approving an increase in the US's $14.3 trillion (?8.9tn) debt ceiling by the 2 August deadline – with Republicans rejecting Obama's demand that tax increases for the wealthy accompany sharp budget cuts – the president warned ordinary Americans of the seriousness of the situation.

"This is not some abstract issue. These are obligations that the United States has taken on in the past. The Congress has run up the credit card and we now have an obligation to pay our bills. If we do not it could have a whole set of adverse consequences. We could end up with a situation, for example, where interest rates rise for everybody all throughout the country, effectively a tax increase on everybody," he said.

But Obama also told a White House press conference that while the situation was serious, it could be resolved. "We don't have to do anything radical to solve this problem. Contrary to what some folks say, we're not Greece, we're not Portugal.

"It turns out that our problem is we cut taxes without paying for them over the last decade ... We fought two wars. We didn't pay for them. We had a bad recession that required a recovery act and stimulus spending."

S&P, which follows Moody's in warning of a possible downgrading of the US's top credit rating, put America on negative watch on Thursday and said there was "at least a one-in-two likelihood" that it could downgrade its debt "by one or more notches ... if we conclude that Congress and the administration have not achieved a credible solution to the rising US government debt burden and are not likely to achieve one in the foreseeable future".

Obama said that political leaders "should not even be this close to a deadline on this issue", but he stood firm in his opposition to Republican plans for $2.4tn in immediate spending cuts. The president said to achieve that level of savings without added tax revenues would require the "gutting" of social programmes that he could not support. He said that when ordinary Americans are asked to contribute more to retirement and healthcare programmes, then "millionaires and billionaires can afford to do a bit more".

Republican leaders in the US Senate appeared to be edging closer to an emergency deal with Democrats that would permit the president to raise the debt ceiling unilaterally, but there was continued opposition from fiscal conservatives in the House of Representatives who view such an arrangement as a victory for the White House. Obama said that the Republicans had "boxed themselves in" with election commitments.

The Republican leadership in the House of Representatives said it won control of the lower house of Congress in last November's election with a mandate to sharply cut government spending without any increase in taxes.

The Tea Party movement and fiscal conservatives intend to hold newly elected House members to that commitment, and warn that any deal with the president that does not include deep cuts or permits tax increases will be viewed as a betrayal.

Obama described any temporary solution that did not tackle long-term spending problems as the least attractive option. "We have a unique opportunity to do something big. We have a chance to stabilise America's finances for a decade, for 15 years or 20 years, if we're willing to seize the moment," he said.

John Chambers, chairman of S&P's sovereign ratings committee, also warned that an interim solution of the kind under discussion in the Senate would not be good enough and that Washington must tackle the long-term debt issue. "If you get a small agreement, that will lead to a downgrade," he told Reuters.

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