Obama stands firm on increasing debt ceiling

Less than a week from his second-term inauguration, US President Barack Obama took on another conflict with Republicans by vowing on Monday not to negotiate on increasing the nation's debt ceiling.

He warned that the consequence of not raising the government borrowing capacity would be "disastrous".

US President Barack Obama speaks during a news conference at the White House in Washington, on Monday. Jim Watson / Agence France-Presse

If Congress fails to lift the debt ceiling of $16.4 trillion, the US government will likely default on its debts late in the second half of February, according to the Bipartisan Policy Center.

"The Republicans will not collect a ransom in exchange for not crashing the US economy. The full faith and credit of the United States is not a bargaining chip," Obama told the last formal news conference of his first term in the White House.

Some Republicans have said that any increase in the debt limit should be matched by dollar-for-dollar spending cuts, a demand that Obama said he will not accept. Other Republicans said they would be willing to let the US debt default or have a government shutdown to force the Obama government to accept deeper spending cuts.

If a solution is not found for the debt ceiling, the US government will be forced to default on many of its financial commitments at home and abroad, and its ability to pay creditors, beneficiaries and others will be limited or delayed.

"If the congressional Republicans refuse to pay America's bills on time, social security checks and veterans' benefits will be delayed. We might not be able to pay our troops," Obama warned.

"Investors around the world will ask if the US is, in fact, a safe bet. Markets could go haywire. It would be a self-inflicted wound on the economy. It would slow down our growth, tip us into recession," he said.

Obama said he was happy to talk with Republicans about ways to reduce the deficit.

Federal Reserve Chairman Ben Bernanke has described a US default as a "recovery-ending event" that would likely trigger another financial crisis.

When the US was near such a default in 2011, it lost its triple-A debt rating from Standard & Poor's for the first time in the nation's history.

China and Japan are the largest holders of US Treasury bonds. According to the US Treasury Department, the Chinese mainland held $1.162 trillion in T-bonds while Japan held $1.135 trillion as of Dec 17. Taiwan and Hong Kong are both among the top 10 US government-debt holders.

Eswar Prasad, a Cornell University professor and former China division chief at the International Monetary Fund, said on Monday that Obama has the political edge, but Republicans have signaled they will take a tough stance, irrespective of the lack of broad public support for their position.

"The absence of a deal to lift the debt ceiling would create turmoil in US bond markets, as well as in other financial markets in the US and around the world. The added uncertainty could send the already weak world economy into a recession," he said.

Prasad said China and the rest of the world are essentially bystanders in this domestic political drama in the US.

"There is little that China or any other country can do to influence the outcome," he said.

Shortly after Obama's speech, John Boehner, the Republican speaker of the House of Representatives, said in a statement: "The American people do not support raising the debt ceiling without reducing government spending at the same time. The consequences of failing to increase the debt ceiling are real, but so, too, are the consequences of allowing our spending problem to go unresolved."