Budget deadlock scares Wall Sreet

RUPERT CORNWELL

Washington

With a partial government shutdown next week looking virtually inevitable, a growing queasiness has started to affect financial markets. They fear the rancorous budget impasse between the White House and Congress might lead to the hitherto unthinkable: a debt default by the US Treasury.

Yesterday, with agreement on the 1995/96 federal budget as far away as ever, Republican leaders on Capitol Hill were finalising separate bills to provide temporary funding to keep the government running, and a raising of the debt ceiling for a month. But both are laden with conditions unacceptable to the White House and President Bill Clinton is expected to veto them both - thus raising the stakes further in a dispute whose shadow falls heavy across the forthcoming presidential campaign.

Hitherto the markets have always believed that for all the posturing, a deal would be struck. However, with Leon Panetta, the White House Chief of Staff, accusing the congressional Republicans of "terrorism," and Speaker Newt Gingrich lashing out at an "irresponsible, destructive" administration, they are no longer quite so sure.

For the second day running, the price of the benchmark 30-year Treasury bond fell yesterday as as Mr Clinton claimed that the stopgap measure authorising a $67bn (pounds 42bn) rise in the federal debt ceiling until 12 December would "make subsequent default inevitable. This is deeply irresponsible. It has never happened, and shouldn't happen now."

According to financial experts, the government has now virtually hit its $4.9 trillion debt limit and, failing agreement, default could theoretically come by Wednesday, when a $25bn interest payment is due. Mr Rubin could stave off the reckoning by dipping into federal savings and pension funds to find the money. But the political brinkmanship would continue - with Mr Clinton looking distinctly better placed than his Republican opponents.

The conflict centres on the 1995/96 federal budget, which should have taken effect on 1 October. But the measure is far behind schedule as Congress wrestles with the huge spending and tax cuts needed to meet the Republican goal of a balanced budget in 2002. Republicans are trying to force Mr Clinton's hand by attaching tough conditions to the stopgap bills. Hence the deadlock.

Mr Clinton must give the lie to charges that when the heat is on, he invariably folds. For the Republicans on the other hand, the row is their best chance to show they mean business about balancing the budget and to deliver on the promises that in 1994 helped them win outright control of Congress for the first time in 40 years.

But the tide may be turning against the Republicans. After at least holding their own in this week's off-year elections, the Democrats have received a further boost from polls of likely voters in congressional elections - encouraging heady hopes that the party might recapture at least the House in 1996.

Mr Clinton's approval rating is at 52 per cent, according to a new Gallup poll, his highest in 18 months. In a presidential match-up, he defeats his most likely opponent, Senator Bob Dole, by 53-43. More than half the electorate say the planned Republican cuts go too far, 60 per cent say he should veto the budget as it stands.

Underlying everything is the perception of the Republicans as extremist, which defiance of the White House may well strengthen. The misgivings are embodied by Mr Gingrich,viewed favourably by 25 per cent of the public and unfavourably by 56 per cent - hardly the basis for a presidential run the Speaker refuses to rule out.