Republicans challenged a presidential veto threat by preparing for a short-term extension of the US debt limit, hardening partisan differences in the face of warnings that a stalemate risks roiling financial markets as soon as tonight.
Senate Majority Leader Harry Reid, a Democrat, declared himself “deeply disappointed” with a Republican stance that’s “pushing us to the brink of a default.” Michael Steel, House Speaker John Boehner’s spokesman, said a short-term extension, which would mean another vote on the nation’s borrowing authority before the 2012 elections, is “inevitable.”
The markets could turn tumultuous if a plan isn’t negotiated over the weekend, said Christian Cooper, head of US dollar derivatives trading in New York at Jefferies & Co.
“The markets will be under very real pressure at the open because the assumption will be there is really no resolution to this,” Cooper said. “The breakdown in negotiations has crossed the line from the political posturing of the last few weeks to potentially a very real crisis.
“The Tea Party is effectively playing Russian roulette with the bond market and they will, with certainty, lose,” Cooper said, referring to a faction of Republican lawmakers that has ratcheted up the pressure for deep cuts in federal spending to curb the deficit. Jefferies is one of 20 primary dealers that trade with the US Federal Reserve.
Treasury Secretary Tim Geithner told congressional leaders at a White House meeting yesterday with President Barack Obama that delaying a deal risked an adverse reaction from credit- rating companies and financial markets. He noted Asian markets open tonight, said an official familiar with the meeting.
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POSITIVE SIGNAL NEEDED
Boehner also signaled danger, telling Republican lawmakers in a conference call that they need to provide a positive signal on a plan to avert default before Asian markets open, Republican congressional aides said.
Obama reiterated his opposition to a short-term extension of the debt limit in his meeting with congressional leaders yesterday, telling them it would be “irresponsible” and “could cause our country’s credit rating to be downgraded, causing harm to our economy,” White House Press Secretary Jay Carney said in a statement.
Obama says he would veto an increase of the $14.3-trillion debt limit, which Treasury officials project will be exhausted on August 2, unless it extends through the 2012 elections.
A Republican congressional aide said Boehner, an Ohio Republican, is pressing for at least $3 trillion in spending cuts in a two-step plan to accompany a debt-limit increase.
DOLLAR FOR DOLLAR
Under Boehner’s plan, a first vote this week would provide a down payment on spending reductions toward the $3-trillion goal, with the debt limit raised only a dollar for each dollar of initial spending cuts, a Republican aide said. Another vote on more spending cuts would be held later, before the short-term debt increase was exhausted under the scenario.
Boehner offered the plan to a bipartisan group of congressional leaders at a meeting in his Capitol Hill office last night after withdrawing the day before from negotiations with Obama on a broader deficit-reduction deal.
House Democratic Leader Nancy Pelosi said Democratic lawmakers “will not make working families and the middle class sacrifice without also calling on everyone to contribute their fair share.”
Any debt-limit increase must pass both the Republican-controlled House and the Democratic-run Senate and be signed by Obama. Democrats have resisted cuts to entitlement programs such as Social Security and Medicare and called for higher taxes, while Republicans have insisted a debt ceiling be accompanied by corresponding spending cuts and no tax increases.
DEADLINE LOOMS
Boehner told Republican lawmakers yesterday he would need to introduce legislation by July 27, one member said, to ensure both chambers could enact it under their regular procedures before August 2, when the Treasury has projected it will exhaust its legal borrowing authority.
Pelosi said the leaders must “make every moment count.” She said there would “absolutely, positively not” be a short-term deal and that leaders weren’t talking about raising the eligibility age for Medicare.
With the debt-limit deadline approaching, Obama said at the White House July 22 that “at minimum” Congress must act to avoid a default that would roil financial markets and damage the economy. He said he was consulting with Treasury Department officials about the potential consequences of a default.
‘HAVE SOME ANSWERS’
“It’s very important that the leadership understands that Wall Street will be opening on Monday, and we’d better have some answers during the course of the next several days,” Obama said.
The weekly performance of Treasuries was down last week for the first time in three weeks, though they rose July 22 amid bets that Obama and lawmakers would reach a deal to reduce the deficit, raise the debt ceiling and avert default. Trading closed before Boehner announced his withdrawal from talks on a broader deal.
Yields on two-year Treasury notes touched the highest in almost two weeks on July 21 as Standard & Poor’s reiterated it saw a 50 per cent chance of cutting the US credit rating within three months. Yields on benchmark 10-year notes rose six basis points, or 0.06 percentage point, to 2.96 per cent July 22 in New York, from 2.91 per cent on July 15, according to Bloomberg Bond Trader prices.
Still, markets through last week hadn’t demonstrated great concern about the potential for a default. Yields on 10-year- notes remained well below the average of 4.06 per cent during the past decade.
WON’T RETURN CALLS
The president didn’t hide his frustration with the turn of events July 22, saying Boehner didn’t return his phone calls during the day and observing it wasn’t the first time during the debt-limit talks he had been “left at the altar.” He declared that Republicans had walked away from “an extraordinarily fair deal.”
“Can they say yes to anything?” Obama said to reporters. “It’s the Republican Party that has said that the single most important thing facing our country is deficits and debts. We’ve now put forward a package that would significantly cut deficits and debt.”
Boehner disputed Obama’s version of the impasse at a press conference shortly after the president’s, saying he exited the talks because the White House “moved the goal posts” on the tax revenue that would be included in a deal. He said the Obama administration wanted “more money at the last minute.”
CUT $1 TRILLION
Obama said in the bid for a deficit-reduction agreement that Republicans have made a prerequisite for raising the debt limit, he was willing to cut $1 trillion from discretionary spending and another $650 billion in entitlement programs, such as Medicare. The president said tax increases of $1.2 trillion he sought were less than what a bipartisan group of senators had proposed.
The aides said a breaking point came after a bipartisan group of senators known as the Gang of Six unveiled its plan on July 19 to slash $3.7 trillion from the debt through spending cuts and a tax overhaul that would produce $1 trillion more in revenue.
The Republican aides said the revenue increase in the plan was larger than one Boehner and Obama had tentatively agreed to. An administration official said the plan changed the political dynamics in the push for a deal.
50 PERCENT CHANCE
Standard & Poor’s warned there is a 50 percent chance it will lower the U.S. government’s AAA credit rating by one or more levels within three months. S&P said that, even if Congress raises the debt limit in time to avert a default, it might lower the U.S. sovereign rating to AA+ with a negative outlook if it isn’t accompanied by a “credible solution” on the debt level.
Such a ratings change would “modestly raise” the government’s borrowing costs, S&P said. If the U.S. defaults on some obligations after Aug. 2, even if it pays bondholders, S&P forecasts short-term interest rates would rise 0.50 percentage points and long-term interest rates by 1 percentage point.
Greater-than-expected tax receipts might give the U.S. Treasury an extra week — until Aug. 10 — before exhausting its borrowing authority, analysts with New York-based Barclays Capital said. The government has collected about $14 billion more in tax revenue since July 14 “than we were expecting,” the analysts wrote.