US and European index futures slumped this morning, Asian shares declined the most in a five-week period and the yen strengthened after US House Republican leaders scrapped a
plan to allow higher taxes in a bid to avoid the "fiscal cliff".
House Speaker John Boehner yielded to anti-tax resistance within his own party, throwing budget negotiations deeper into turmoil. House members and senators won't vote on budget issues until after Christmas, giving them less than a week to reach agreement to avert tax increases and spending cuts set to take effect in January.
The hardening partisan divide makes the path to steering away from the so-called fiscal cliff more uncertain.
"It's cutting it quite close, and the pressure is definitely on the politicians," Shane Oliver, head of strategy at AMP Capital Investors Ltd., which has almost $130 billion (€98.5 billion) under management, said in Sydney. "If they go off the fiscal cliff, the US economy could go into a recession. At stake is the US economy and by implications the global economy."
Mr Boehner called on President Barack Obama and Senate majority leader Harry Reid to come up with legislation to avoid the more than $600 billion of tax increases and spending cuts scheduled to start in January. The Congressional Budget Office has said that a failure to avert those changes would probably lead to a recession in the first half of 2013.
"The president's main priority is to ensure that taxes don't go up on 98 per cent of Americans and 97 per cent of small businesses in just a few short days," White House spokesman Jay Carney said in an e-mailed statement.
"We are hopeful that we will be able to find a bipartisan solution quickly."
Now that Mr Boehner's "Plan B" for addressing the fiscal cliff has crashed and burned, the top US Republican appears to have two remaining options - wash his hands of the entire matter or negotiate a compromise with Democrats that could abandon scores of his fellow Republicans.
The Republican rank and file and Democrats may face an equally stark choice: work together for a change, or plunge together off the cliff.
Mr Boehner tried to ram a "fallback" plan through the House yesterday - a relatively tiny tax increase on millionaires and billionaires - and failed. His rambunctious Republicans, who see opposition to all tax hikes as a matter of bedrock principle and of political survival, refused to go along.
President Barack Obama and his Democrats who control the Senate take the opposite view - tax hikes on the wealthy are a condition for their support of a fiscal cliff Bill. If there is to be a resolution it will largely depend on an improbable scenario - Democrats in the House teaming up with less militant Republicans to back away from the fiscal cliff.
Compromise has been out of style in recent years, and many think it could require some prodding from the markets.
"At this point, I only see one route to avoiding the cliff, a replay of the TARP debacle in 2008," said George Washington University's Sarah Binder, an expert on Congress. In September 2008, the House defeated the bank bailout Bill and the market collapsed, prompting a terrified lawmakers to reconsider and pass it.
"In this case, a harsh market and public reaction would be needed to force the hand of the speaker to negotiate a deal that can pass with Democratic votes," she said.
"If the GOP takes a beating in the headlines and the market tanks, I suspect a good number of rank-and-file GOP will demand that the speaker go back to the table. But absent whiplash from the markets and voters, I suspect it's over the cliff we go."
For the time being - or at least the 11 days until the automatic tax hikes and spending cuts are triggered - the House is in disarray and no deal to avert the fiscal cliff is in sight.
While the House in recess for a Christmas break that is likely to last at least until December 27th, Mr Boehner must decide whether to move any further in Obama's direction and agree to tax increases much higher than his own proposal that so angered his fellow Republicans on yesterday.
The Ohio Republican also might have to settle for fewer long-term spending cuts than he had hoped for.
Mr Boehner's only other apparent option - one that he hinted at late yesterday following the collapse of his Bill - would be to walk away and leave the problem on Democrats' doorstep.
"Now it is up to the president to work with Senator Reid on legislation to avert the fiscal cliff," he said in a statement referring to majority leader Harry Reid.
But in a closed-door session before that statement, Republican lawmakers said Mr Boehner told them that he would at least try to work out something with Mr Obama.
Either way, Mr Boehner faces the possibility of having to battle not only Democrats for the next two years, but also his own membership on major Bills.
"We have people (Republican lawmakers) who felt like they had to stand on the principle ... they couldn't vote for anything (that raised any taxes). I don't quite understand it," lamented Representative Buck McKeon, the powerful chairman of the House Armed Services Committee, who oversaw passage of a $633 billion defense spending bill for 2013.
"If you don't have the votes, you can't move forward," McKeon said of the Plan B fiscal cliff bill.
Representative Steven LaTourette, a moderate Republican who is retiring at year's end, told reporters that Thursday's legislative defeat - and public relations failure - will not stop Boehner from being re-elected House Speaker on January 3rd. "Name one member who opposes him," LaTourette challenged reporters.
Firing Mr Boehner, Mr LaTourette said, would be "like saying the superintendent of the insane asylum should be discharged because he couldn't control the crazy people."
Nonetheless, two years into his stint as Speaker, Mr Boehner still has not found the right formula for corralling his Republican majority, especially the Tea Party conservatives whose victories in 2010 helped Republicans wrest control of the House. However, he has taken steps in recent weeks to punish a handful of uncooperative Republicans.
Since unveiling his plan on Tuesday, several conservative groups, including the Heritage Foundation, waged a spirited effort to kill the measure.
Those groups, Mr LaTourette said, had been "making their phone calls, and they're bombing people" with pressure to vote against the bill. That, he added, "makes people nervous" about primary election challengers being recruited in 2014 by outside groups to defeat Republican lawmakers who vote for any tax increase.
"I doubt his speakership is in trouble," said American Enterprise Institute scholar Norm Ornstein, "The big question is whether, and when, he is willing to bring up a bill that will require more Democrats than Republicans to pass."
Agencies