The House of Representatives planned to vote today on adebt-limit increase proposal that confronts unified Democraticopposition in the Senate, setting the stage for a congressionalshowdown to avert a U.S. default.

House Speaker John Boehner of Ohio gained support among fellowRepublicans for his plan to raise the debt ceiling after reworkingthe legislation to cut $917 billion over 10 years, more than hisoriginal approach. All 51 Senate Democrats and two independentssigned a letter yesterday pledging to oppose the measure.

As congressional leaders continued to wrangle with less than aweek before a potential U.S. default on Aug. 2, stock marketsshowed jitters. The Standard & Poor's 500 Index fell 2 percentyesterday, the biggest drop in almost two months, and the cost ofinsuring against a U.S. default climbed to the highest level sinceFebruary 2010.

Senate Majority Leader Harry Reid held out hope for adeficit-cutting compromise. “Magic things can happen here inCongress in a very short period of time under the rightcircumstances,” the Nevada Democrat told reporters.

The struggle to resolve the impasse helped send European stocksdown, with the Stoxx 600 Index falling 0.9 percent at 11:03 a.m. inLondon. Standard & Poor's 500 Index futures were little changedafter a three-day slump in the U.S. stock gauge. The yen rosetoward a four-month high against the dollar. Gold traded within 1percent of a record.

Reid-McConnell Dialogue
Reid and hisRepublican counterpart, Minority Leader Mitch McConnell ofKentucky, maintained a private dialogue on developing a path to adebt-limit increase in the Senate, where bipartisan support isneeded to gain the 60 votes necessary to ensure a vote oncontroversial legislation.

There is already considerable overlap between Boehner's plan andone that Reid offered on July 25.

Reid dropped Democrats' insistence on tax increases. His andBoehner's proposals take as their starting points a cut of close to$1 trillion in discretionary spending cuts over 10 years, and bothestablish bipartisan committees to recommend future savings, withthe results guaranteed a congressional vote.

The two sides are divided over a Republican demand for a seconddebt-limit vote tied to another $1.8 trillion in budget cuts thatlikely would come early next year, just as 2012 election campaignsare gearing up. Democrats would extend the debt ceiling until 2013while making $2.2 trillion in total spending cuts, including $1trillion from winding down the Iraq and Afghanistan wars, a savingsRepublicans criticized as a gimmick.

Consultations
Reid and McConnell areconsulting on what it would take to push legislation through byAug. 2, said Richard Durbin of Illinois, the Senate'ssecond-ranking Democrat.

Typically, “a lot of it will happen in private meetings whereefforts will be made to reach an agreement and a consensus and thenbring it to the floor and sell it to the members,” Durbin said.

Standard & Poor's President Deven Sharma declined to pick awinner among lawmakers' deficit-reduction plans, telling a Housepanel that decisions on whether to downgrade the nation's debt willhinge on the long-term impact of any final measure.

“We are waiting for what the final proposal is” before decidingwhether to keep U.S. debt at the highest ratings level, Sharmasaid. The hearing was called to review the performance ofcredit-ratings companies since last year's passage of the Dodd-Frank financial-sector overhaul law.

'I Sure Did'
Boehner and Republicanleaders worked behind the scenes to corral Republican votes for hisplan. Radio host Laura Ingraham, alluding to a part of the anatomy,asked Boehner whether he told members at a closed-door meetingyesterday to get “your A-word in line” behind his debt bill.

“I sure did,” Boehner replied. “Listen, this is time to do whatis doable.”

Boehner said his bill is “the best opportunity we have to holdthe president's feet to the fire.”

Republicans are under pressure from fiscally conservativeadvocacy groups who say the plan would do too little to controlfederal spending. Several organizations, including the Club forGrowth, Heritage Action and the Tea Party-affiliated FreedomWorks,oppose the plan and are pressuring lawmakers to do the same.

Democrats aren't likely to make up for any defections. HouseDemocratic Whip Steny Hoyer of Maryland said there won't “be verymany if any” Democratic votes for the plan.

No Democratic Support
So far no Democrathas publicly come out for it. That means Boehner can lose no morethan 23 of the 240 House Republicans to get the 217 votes to passhis plan in the 433 member chamber. Two seats are vacant.

As of last night, 17 Republicans had said they planned to opposethe plan, and five others categorized themselves as leaning in thatdirection.

The pressure on members was intense. Representative Tom Reed, afirst-term Republican from New York, said yesterday he was upthrough the middle of the night trying to decide how he will voteon Boehner's proposal. He said he decided around 4 a.m. to back thespeaker after saying earlier he would oppose the plan.

“I'm a firm yes,” Reed said. “We've been looking at this realhard. This has been a very stressful period of time. It's notexactly what I'm looking for, it's not what we came to Washingtonto do, but it's a step in the right direction.”

At least six members said during yesterday's meeting of HouseRepublicans they were leaning toward supporting the bill afterpreviously saying they would oppose it, according to a Republicanaide who spoke on condition of anonymity.

Confident Opponents
Even so, someopponents in the party predicted they would prevail.

“We can hold the line,” Representative Steve King, an IowaRepublican and a foe of the plan, told a group of Tea Partyadvocates who rallied outside the Capitol.

Senator John McCain of Arizona, the 2008 Republican presidentialnominee, took to the Senate floor to criticize what he called “TeaParty hobbits.” He said they appear to believe the public wouldblame a government default on Obama, not Republicans.

A U.S. default would be “devastating” to consumers who would beaffected by higher interest rates, said Michael Duke, president andchief executive officer of Wal-Mart Stores Inc.

“A default and the ripple effect would be impactful,” Duke toldthe Senate Finance Committee. He said both the reality and theperception of a default would hurt the U.S. economy

Treasury Rates Rise
Rates on Treasurybills set to mature just after the Aug. 2 debt-ceiling deadlinerose yesterday to the highest level in five months. Five-year notesauctioned yesterday, which will be issued a day before the debt capis reached, drew a yield of 1.580 percent, compared with theaverage forecast of 1.547 percent in a Bloomberg News survey ofnine of the Federal Reserve's primary dealers.

Rates on Treasury six-month bills due Aug. 4 touched 0.16percent yesterday, the highest level since February, according toBloomberg Bond Trader data. Yields on the benchmark five-year notefell two basis points to 1.54 percent today. Two-year note yieldsalso declined two basis points, to 0.43 percent.

“The market is saying, 'we need a deal here,'” said MichaelFranzese, managing director and head of Treasury trading atWunderlich Securities Inc. in New York.

Bloomberg News

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