Debt Accord Elusive

Senate leaders seek end to U.S. shutdown.

Senate leaders have yet to reach an agreement on how to end the U.S. fiscal impasse amid mounting concern in financial markets three days before the government’s borrowing authority lapses.

Senate Majority Leader Harry Reid said yesterday that he had a “productive conversation” with Minority Leader Mitch McConnell without reaching a conclusion on a plan to send to the Democratic-controlled chamber for a vote.

Their phone call yesterday produced “nothing new to report,” said Don Stewart, a spokesman for McConnell. Earlier, McConnell issued a statement saying “it’s time for Democrat leaders” to support a plan, based on one drafted by Republican Susan Collins of Maine, which Democrats rejected Oct. 12.

“The discussions were substantive and we’ll continue those discussions” Reid said on the Senate floor as the parties remained divided over federal spending levels. “I’m optimistic about the prospects for a positive conclusion.”

While optimism also was expressed by Democratic and Republican senators on Sunday television talk shows, there was little evidence to support their words as the government’s partial shutdown entered its third week and the markets are weighing the short time left to avert a U.S. default.

Standard & Poor’s 500 Index futures dropped 0.7 percent today and the MSCI Asia Pacific excluding Japan Index retreated 0.2 percent. Equity markets in Japan and Hong Kong are closed for holidays.

U.S. stock markets will be open on the federal Columbus Day holiday today. Bond markets are closed.

The congressional deadlock over increasing the U.S. debt ceiling from $16.7 trillion is threatening the U.S. and world economies, said International Monetary Fund Managing Director Christine Lagarde.

“If there is that degree of disruption, that lack of certainty, that lack of trust in the U.S. signature, it would mean massive disruption the world over,” Lagarde said in an interview on NBC’s “Meet the Press” program about the impact of not raising the borrowing limit. “And we would be at risk of tipping, yet again, into recession.”

 

Shifting Focus

The Senate talks are shifting away from Republican efforts to curtail President Barack Obama’s health-care law, the 2010 Patient Protection and Affordable Care Act to focus on spending and the duration of the debt-ceiling extension.

Polls show the public is putting most of the blame for the 14-day partial government shutdown on Republicans.

Collins’s group of moderate senators trying to frame a deal didn’t meet yesterday and talks probably will resume today, said a Senate Democratic aide with knowledge of the negotiations, who spoke on condition of anonymity.

“It’s taken far too long, we never should be in this situation, but I do believe we are going to see a resolution this week,” Collins said yesterday on CNN’s “State of the Union.” Voicing optimism that her plan will provide a framework for an agreement, she said “a lot of constructive discussions” are going on behind the scenes.

Six senators working with Collins -- Democrats Joe Manchin of West Virginia, Heidi Heitkamp of North Dakota, Mark Pryor of Arkansas, Amy Klobuchar of Minnesota and Joe Donnelly of Indiana and independent Angus King of Maine -- yesterday said they don’t support the proposal in its current form.

“Productive, bipartisan discussions” have taken place, “but there is no agreement,” the senators said in a statement.

Obama, in a phone call with House Minority Leader Nancy Pelosi of California, “reinforced that there must be a clean debt limit increase” -- and a stopgap spending measure also free of policy add-ons -- before budget negotiations can begin, according to a White House statement.

Obama spent yesterday calling top lawmakers and getting staff briefings about the impact of the shutdown on federal operations, according to aides who spoke on condition of anonymity. The aides didn’t rule out the possibility that Obama could meet with lawmakers or make a public statement if there’s progress toward a deal or markets tumble.

Vice President Joe Biden, who played a critical role in previous fiscal standoffs, has kept a lower profile this time, spending the weekend in Camp David in rural Maryland. An aide described him as fully engaged in the discussions.

 

Spending Levels

The Senate negotiations include discussions of easing the spending caps imposed by the across-the-board cuts known as sequestration. Richard Durbin of Illinois, the second-ranking Democrat in the Senate, said there is a $70 billion spending gap between Democrats and Republicans.

Disagreement over spending is the big sticking point, said Jim Manley, a former aide to Reid. Manley, in a telephone interview, said he’s watching “to see if Senator McConnell demands some sort of fig leaf from Senator Reid to protect the speaker or whether he’s prepared to throw him overboard to get this all behind him.”

Time is running short for the Senate to pass any agreement and for the House to act on it before Oct. 17, when U.S. borrowing authority lapses. The federal government would start missing payments sometime between Oct. 22 and Oct. 31, according to the Congressional Budget Office.

Representative Tim Huelskamp, a Kansas Republican, played down the importance of this week’s deadline and said the White House “is trying to scare the markets.”

“Oct. 17 is a date that won’t have a major impact unless the White House can create concern about that,” Huelskamp said on CBS’s “Face the Nation.”

That’s at odds with a view from China, the largest foreign holder of U.S. Treasuries. In an English-language commentary yesterday, Liu Chang, a writer with China’s official Xinhua News Agency, said the impasse has put many nations’ dollar assets “in jeopardy.” China held $1.28 trillion in Treasuries at the end of July.

Liu called for a new international reserve currency to replace the dollar “so that the international community could permanently stay away from the spillover of the intensifying domestic political turmoil” in the U.S.

The impasse in Washington “is wreaking havoc around the world,” Senator Bob Corker, a Republican from Tennessee, said on “Fox News Sunday.” “I hope over the next week we will reach a conclusion. I think we will.”

 

Sequestration Cuts

Reid and McConnell on Oct. 12 held their first negotiating session since the shutdown began Oct. 1. “The frameworks they had were not far apart,” Democratic Senator Charles Schumer of New York said yesterday on “Face the Nation,” referring to McConnell and Reid’s effort. “The dispute has been how to undo” the sequestration cuts.

Senate Democratic leaders said Collins’s proposed debt-limit increase to January was too short to provide certainty, and her plan’s funding extension at Republican-favored levels, until March, was too long. Senator Dianne Feinstein, a California Democrat, also opposed the plan because it would have locked in lower spending for discretionary domestic and defense programs.

The Budget Control Act of 2011 established a $967 billion cap for fiscal 2014, a $21 billion cut compared with the fiscal 2013 level. If Congress doesn’t pass legislation to reduce spending or alter the cap before January, a second round of automatic cuts goes into effect to meet that goal.

Collins’s plan sought to give federal agencies more flexibility under the across-the-board cuts. The plan also would have set a mid-January deadline for longer-term budget talks and made two changes to the president’s health-care plan: delay a tax on medical devices for two years -- making up lost revenue through pension-rule changes -- and requiring the Obama administration to verify income levels for enrollment in health benefits.

A Senate deal probably would face the prospect of a hostile reception from House Republicans still seeking to curtail Obamacare and opposed to easing spending caps.

“We are not going to increase spending,” Representative Jim Jordan, an Ohio Republican, said on Fox. “The sequester is one of the few good things we’ve done to control spending.”

Republican strategist Ron Bonjean yesterday described the latest efforts to find a way out of the impasse as “a Rubik’s Cube from hell,” adding that even if the Senate passes a plan, it would be “still pretty much a jump ball in the House.”

“They may simply reject it without offering a Plan B,” Bonjean, a one-time aide to former Republican Speaker Dennis Hastert, said in a telephone interview.

 

Bloomberg

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