Obama to address nation as debt fight rages

US President Barack Obama scheduled a rare prime-time speech to the nation today as polarised lawmakers failed to rally behind a plan to avert a disastrous debt default perhaps just one week away.

The prospect of the world's richest country running out of cash to pay its bills come August 2 sent stocks sliding and gold soaring while the IMF warned of a "severe shock" to the world economy absent an elusive breakthrough.

Obama's 9 pm (1pm NZ) speech from the White House's ornate East Room would be only his seventh formal address to the nation, and the first since he unveiled a timeline for a US troop withdrawal from Afghanistan in June.

The address came with Democrats who control the Senate and Republicans who lead the House of Representatives at odds over rival plans for raising the $14.3 trillion US debt limit, allowing cash-strapped Washington to stay open.

Washington hit its debt ceiling on May 16 but has used spending and accounting adjustments, as well as higher-than-expected tax receipts, to continue operating normally but can only do so through August 2.

At that point, US leaders will face an agonising choice about cutting an estimated 40 cents of every dollar in spending and defaulting either on debt payments or on other obligations like government health or retirement benefits.

Finance and business leaders have warned that failure to raise the US debt ceiling by then would send shockwaves through the fragile world economy, while Obama has predicted a default would trigger economic "Armageddon."

All sides in the dispute agree cash-strapped Washington must reduce its deficit but disagree on the size and blend of spending cuts and revenue increases as well as on how and whether to slice into the social safety net.

"We need to make the right decision now, and we need to do it because the economy is on the line," Democratic Senate Majority Leader Harry Reid warned with the polarised US Congress seemingly no nearer to a breakthrough.

Reid and Republican House Speaker John Boehner have presented rival strategies to raise the US debt limit, deflate the swollen US budget deficit, and ensure Washington can continue to pay its bills.

The plans differed in one critical, politically divisive aspect: Reid's would meet Obama's goal of raising the $US14.3 trillion debt ceiling enough to avoid another politically painful standoff before his November 2012 re-election bid.

Boehner - who has flatly rejected Obama's call for tax hikes on the rich and on wealthy corporations - envisioned a two-step process with increases first to February or March 2011, and later to 2013.

"Time is running short and it would be irresponsible for the president to veto this common-sense plan and run the risk of default. I would encourage the Senate to pass this plan and the president to sign it," said Boehner.

Obama was expected to use his address to prop up Reid's plan, which Republicans have vowed to kill when both strategies face midweek votes.

Weighed down by the impasse, US stock markets fell and safe-haven Swiss francs soared amid worries about both the dollar and the euro, while gold climbed to a record $1,624 an ounce before falling back slightly to $1,614.

The dollar lost 1.6 per cent to the Swiss franc while US Treasury prices fell - though not enough to signal panic in the bond markets. The yield on the 10-year Treasury rose to 3.00 per cent from 2.96 per cent late on Friday.

"The odds that the United States will face a ratings downgrade, even if the debt-ceiling is raised, have clearly risen," said Nigel Gault of IHS Global Insight, referring to Washington's sterling Triple-A debt rating.

Market worries came as US Secretary of State Hillary Clinton promised during a trip to Asia that "intense" wrangling among the White House, its Democratic allies, and Republican foes would reach an 11th-hour compromise.

"I am confident that Congress will do the right thing and secure a deal on the debt ceiling and work with President Obama to take steps to improve our long-term fiscal outlook," the top US diplomat said in Hong Kong.

The International Monetary Fund pressed polarized US politicians to raise the US debt ceiling "expeditiously to avoid a severe shock to the US economy and world financial markets" with the deadline now looming large.

The IMF warned that US debt would total 99 per cent of the size of the US economy this year and 103.0 per cent in 2012, and urged a blend of spending cuts, tax revenue increases, and reductions in cherished social safety net programs.

-AFP

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