NBC News and news services
updated 7/14/2011 1:33:05 PM ET 2011-07-14T17:33:05

President Barack Obama and top Republicans face growing pressure Thursday to surmount acrimonious divisions over how to avoid a U.S. debt default as an Aug. 2 deadline looms for raising the national debt ceiling.

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China, the biggest American foreign creditor with more than $1 trillion in Treasury debt as of March, called on the U.S. government Thursday to adopt "responsible policies" to protect investor interests.

The Foreign Ministry comments followed a warning by Moody's Investors Service that it might strip the United States of its gold-plated credit rating in coming weeks if the $14.3 trillion limit on America's borrowing was not raised.

The prospect of a cut in the American AAA credit rating hit stocks prices globally, and weakened the dollar.

Gold prices pushed to a record high as investors saw the precious metal as a safer place for their cash.

Koen De Leus, an economist at KBC Securities in Belgium, said the default risk is political so a last-minute U.S. deal would be struck, a view shared by many in financial markets.

Can order emerge from chaos on the debt deal?

"But it does create additional nervousness on the top of all other issues like the uncertainty about U.S. growth in the second half of 2011, inflation problems in emerging countries and the European debt problem," De Leus said.

The U.S. talks on Wednesday lasted nearly two hours and were the stormiest yet.

Story: Obama-GOP debt talks get tense at White House

They ended with Obama telling Republicans that "enough's enough."

The session was marked by partisan recriminations and laid bare stark differences between the Democratic president and his Republican rivals over taxes and deficits.

An election issue
The outcome of the talks doesn't have just fiscal implications. They could also have big implications for the 2012 presidential campaign, where Obama is seeking re-election.

An agreement must be forged to raise America's debt limit by Aug. 2 or the government will run out of money to pay its bills and default on some obligations.

NYT: No-tax debt deal? Most in poll say otherwise

Failure to act could send shockwaves through the global financial system, Federal Reserve Chairman Ben Bernanke said Wednesday. Obama has warned that the U.S. economy could be pushed back into recession.

Those prospects are worrying investors, including the Chinese government, which fears even a small default could destabilize the global economy and sour political relations.

"We hope that the U.S. government adopts responsible policies and measures to guarantee the interests of investors," China Foreign Ministry spokesman Hong Lei said at a regular briefing in Beijing. He did not elaborate.

Video: Debt talks hit a wall in Washington (on this page)

Analysts estimate that some 70 percent of China's $3.2 trillion in foreign exchange reserves are invested in dollar assets.

Few markets other than the U.S. Treasury market are big enough to absorb China's reserves accumulation, which was $152.8 billion in the second quarter of 2011.

Cantor: Obama walked out
Despite the financial and economic concerns, political brinkmanship has continued.

Eric Cantor, the No. 2 Republican leader in the House of Representatives, said Wednesday's meeting became so acrimonious that Obama walked out.

By Cantor's account, the president said that he "had sat there long enough and no other president -- Ronald Reagan wouldn't sit here like this, and that he's reached the point that something's gotta give."

"And he said to me, 'Eric, don't call my bluff,'" Cantor said. "He said, 'I'm going to the American people with this.'"

Democratic officials said Cantor's account was exaggerated.

Obama simply finished impassioned remarks, then rose and went into the Oval Office, they said.

"Cantor's account of tonight's meeting is completely overblown," one aide said, claiming that Cantor repeatedly interrupted Obama. The aide said House Speaker John Boehner should rein in Cantor.

Bernanke on Wednesday said if the debt limit is not raised in time, the United States would pay its bondholders first.

Friday deadline
That would mean other payments, such as Social Security to the elderly, would be the first hit — a political nightmare for both lawmakers and the president.

Obama, who has sought to cast himself as a centrist in the debate, accused Republicans of partisan posturing that was keeping the two sides from agreement.

Video: Obama: 'I cannot guarantee those checks go out on Aug. 3' (on this page)

Obama's 2012 re-election hopes hinge not only on reducing the United States' 9.2 percent unemployment rate but on his appeal to independent voters who are increasingly turned off by the rancor in Washington and want the country's fiscal house in order.

Republicans demand $2.4 trillion in spending cuts in return for supporting an increase in the debt limit. Democrats and Obama insist on tax increases for the wealthy as part of a deal.

The two sides will talk again starting at 4:15 p.m. ET Thursday, and tax will dominate the discussions. The president has set a Friday deadline for agreeing a way forward.

Democratic officials said Obama has backed $1.7 trillion in cuts and is prepared to accept more.

But congressional Democrats don't agree on all of those cuts said Cantor, who put the total area of agreement at $1.4 trillion.

NBC News and Reuters contributed to this report.

Video: Moody’s: US may lose top credit rating

  1. Closed captioning of: Moody’s: US may lose top credit rating

    >>> now to washington and the heated showdown over raising the debt ceiling. both sides will be back to the negotiating table later this afternoon this after lawmakers received a dire warning about what could happen to the nation's credit rating if a deal is not reached. kristen welker is at the white house for us.

    >> reporter: just when you thought the debt talks couldn't get uglier, they did on wednesday with both sides admitting the discussion became a bit combative at times. wall street is worried about washington . late wednesday, moody's, one of the nation's big three credit rating agencies , warned it might have to lower the country's top notch credit rating if lawmakers don't come it an agreement soon on raising the debt ceiling. this a starnlgts moodeddy's said its action was prompted by the possibility that the debt limit will not be raised in time to prevent a missed payment on u.s. bonds with a small but rising risk of a short-lived default. economists say if the aaa rating is lowered, it would throw the financial markets in to chaos and the cost of were rowing would go up for everything from mortgages to car loans. federal reserve chairman ben bernanke warned --

    >> i think the worst outcome is that at some point, you know, we default on the debt and that would creates a i said before a huge financial calamity.

    >> reporter: sources say the president knew about the moody's warning as he headeded in to wednesday's meet which go all sides have described as very tense. republican majority leader eric cantor quoted the president as saying, i have reached the point where i say enough. would ronald reagan be sitting here? i've reached my limit. mr. obama then left saying i'll see you tomorrow. but the two sides couldn't enagree about what happened in the meeting. according to cantor, the president got veriage stated and stored out. but a democratic aide calls cantor's account overblown. the aide also says it was cantor who rudely enter represented the president three times. and there was even rancor outside the meeting.represented the president three times. and there was even rancor outside the meeting. boehner said dealing with the democrats is a lot like dealing with jello. today the topic will being taxes. president obama said on friday he wants lawmakers to figure out whether they want for pursue this deficit reduction package or whether they want to take another course.

    >> all right, kristen welker this morning. thanks.

    >>> jim cramer is the the host of cnbc's " mad money ." good morning. worst case scenario , the dweel is pot reached and the u.s. credit rating is lowered. what happens next?

    >> at that point, interest rates will go up because foreign countries, foreign banks, what they do is they sell any sort of sovereign bond , that's what you're u.s. debt is called. when they see debt ratings. so housing probably slows down, job creation definitely slows down. stock market probably gets hit, too.

    >> so you're saying on august 3rd , what happens in the markets?

    >> we will have a selloff for everything other than gold. the dollar will agree down. and you have to expect to repeal some of the gains we've had shathis year.

    >> you say even just the warning from moody will cause a little bit of a selloff today?

    >> i certainly don't think that panic is the right thing to do here. this is a shot across the bow . you have to understand the ratings agency predicament. when the federal reserve chairman comes on and talks about a financial calamity, when the president talks about social security checks, they can't be oblivious. they're doing their job. let's hope that congress and the president do their job.

    >> we're just talking about how it's going to affect main street and wall street , but yesterday michele bachmann said it's simply not true that if the debt ceiling isn't raised we will lose the full faith and credit of the united states . so who is right on this?

    >> i'm from wall street . i deal with people and used to be a big buyer and serld of bonds. when you're the chinese, they're our largest debt holder. they're not talking or listening to michele bachmann . they're listening to very prudent treasury officials that say we don't need this junk, let's sell. that's how rates go up.

    >> so what is the bottom line for the so-called recovery?

    >> if you're trying to create jobs, which we december pretty desperately need to do, you'd do the exact opposite of what's happening in washington . any resolution will create job growth , will create a level of certainty that we don't have right now.

    >> so basically looking at all that, your gut on whether they'll get a deal?

    >> i think they have to get a deal. the financial calamity that ben bernanke talks about is a reality. so without a deal, nothing looks that good in this country.

    >> on that note, jim cramer , thank you so much.

    >>> and you can catch jim on " mad money " week nights at 6:00 and 11:00 p.m . eastern time on cnbc. it

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