Lawmakers Look at Ways to Avoid Default

Democrats weigh adding spending cuts to McConnell debt plan.

Senate leaders from both parties are discussing backup options to avert a U.S. default by adding spending controls to a plan that would grant President Barack Obama unilateral power to raise the debt limit.

Obama told lawmakers they have until tomorrow to decide whether they can reach a deal to make significant cuts in the deficit or settle for another way to raise the $14.3 trillion debt ceiling before U.S. borrowing authority expires Aug. 2, two Democratic officials said.

The president and bipartisan congressional leaders met today at the White House after yesterday’s negotiations ended on a tense note and Moody’s Investors Service warned that the stalemate could jeopardize the nation’s credit rating.

Before the White House negotiating session, the fifth in as many days, Senate Democratic Leader Harry Reid of Nevada and Republican Leader Mitch McConnell of Kentucky were engaged in their own talks on an option to avoid a default, Reid confirmed to reporters today.

Senator Charles Schumer of New York, the chamber’s third- ranking Democratic leader, said while Democrats still want to see a comprehensive deal emerge from White House-led talks, they are considering modifying a plan McConnell offered earlier this week as a “last-choice” alternative.

 

Installments
McConnell’s proposal would grant Obama authority to raise the debt limit in installments unless Congress disapproves by a two-thirds majority -- a near impossibility with the Senate controlled by Democrats -- while Obama would also be required to offer spending reductions.

Those cuts would be advisory, and the debt-ceiling increase would occur regardless of whether lawmakers enact the cuts, McConnell said. The idea drew criticism from both sides of the aisle, particularly from Republicans who said it would fail to curb spending.

Schumer said one option under consideration to build legislative support is to couple the McConnell plan with a package of spending cuts smaller than the amount Republicans have demanded -- a dollar in spending reductions for every dollar increase in debt authority.

Another means of attracting votes under consideration is to add a commission modeled along the military base-closing panels that would recommend additional spending cuts, said two Republican aides familiar with the talks who requested anonymity.

 

Not Credible
Still, Senate Budget Committee Chairman Kent Conrad, a North Dakota Democrat, cast doubt on the viability of the options under discussion.

“I have not yet heard a package that I believe is credible in dealing with the debt that builds off of the McConnell plan,” Conrad said.

Senior financial regulators came to the Capitol to highlight the economic consequences of a U.S. government default.

U.S. Treasury Secretary Timothy Geithner said today that there is “no way to give Congress more time” on lifting the debt ceiling. He made his comments after meeting with Senate Democrats at the Capitol.

Federal Reserve Chairman Ben S. Bernanke warned in testimony to the Senate Banking Committee that lawmakers would cause a “self-inflicted wound” if they prompt a credit-rating downgrade by failing to raise the debt ceiling.

 

Investors Unperturbed
Investors showed few signs of being fazed by the drama in Washington, largely because bond traders said they considered the possibility of default remote.

The Treasury attracted higher-than-average demand for a third consecutive sale at today’s auction of 30-year bonds. The bid-to-cover ratio on the $13 billion in bonds, which gauges demand by comparing total bids with the amount offered, was 2.80, versus a 2.64 average at the past 10 sales.

The yield on 10-year Treasuries was 2.95 percent as of 3:35 p.m. in New York, according to Bloomberg Bond Trader, after falling to a low this year of 2.81 percent on July 12. That compares with an average of 7 percent during the past four decades.

“The market seems to believe that the debt-limit situation will be resolved satisfactorily,” said Jeffrey Caughron, a partner at Baker Group LP in Oklahoma City who advises community banks on investments of more than $30 billion. “Most market participants see it unthinkable that the president and the Congress would allow a default, even a partial default on U.S. obligations.”

 

Camp David
Obama considered inviting the lawmakers to Camp David for a weekend negotiating session, according to two people familiar with the matter. Obama press secretary Jay Carney said today that a Camp David summit “is not currently planned,” and that meetings in the coming days are planned for the White House.

The increasing tension between Democrats and Republicans was underscored by dueling accounts of yesterday’s White House meeting and its sour ending. Obama “got very agitated” and left the room after House Majority Leader Eric Cantor suggested a vote on a smaller deal, Cantor said in an interview.

“Don’t call my bluff; I am going to the American people,” Obama said, according to Cantor, a Virginia Republican.

Reid, a Nevada Democrat, said today that Cantor has shown “he shouldn’t be at the table,” adding that “it was childish” when Cantor quit attending earlier negotiating sessions led by Vice President Joe Biden.

 

Do Right Thing
Laena Fallon, a spokesman for Cantor, responded by saying, “This isn’t a question about personalities -- Eric, President Obama or Harry Reid -- it’s about doing what is right for the country.”

Other Democratic officials disputed Cantor’s characterization of Obama’s demeanor. White House officials, meanwhile, concede they may have to accept a smaller accord as Republican opposition to tax increases as part of a deal hardens and both sides acknowledge a government default could send the U.S. economy into a tailspin.

Both sides have few options for resolving the standoff quickly. Obama said he would veto any plan that doesn’t raise the debt ceiling through the 2012 elections. Republicans demand $2 trillion or more in spending cuts without any tax increases.

The two sides had identified about $1 trillion in discretionary spending cuts and $500 billion in other savings from agriculture subsidies and other non-health-care-related spending.

In a sign of concern within the financial community, the U.S.’s Aaa bond rating was put under review by Moody’s, a possible prelude to a downgrade that would trigger higher borrowing costs.

“There is a small but rising risk of a short-lived default,” Moody’s said.

 

Bloomberg News

 

 

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