July 25 (Bloomberg) -- The Obama administration and House Speaker John Boehner’s office exchanged charges of intransigence in talks aimed at averting a U.S. default Aug. 2 and tackling the nation’s $14.3 trillion debt.
Boehner’s office said he will unveil a plan today to prevent a default, cut spending and deny President Barack Obama a “blank check” to borrow more money without further reductions. Boehner told fellow Republicans he was determined to force action on a two-step debt-limit extension that would provide a $1 trillion, shorter-term increase than Obama seeks, defying a veto threat and the administration’s warnings of dire economic consequences.
The Senate’s top Democrat Harry Reid readied his own proposal, which would hand Obama the full $2.4 trillion in additional borrowing authority he has requested -- enough to last through the 2012 elections -- tied to a $2.7 trillion package of spending cuts that would leave Medicare and Medicaid untouched, according to a Senate Democratic aide.
White House Communications Director Dan Pfeiffer, in a White House blog posting, today accused Republican congressional leaders of taking a “my way or the highway” approach that “could put our credit rating at risk and leave the cloud of uncertainty over the American people.”
Boehner’s office called Obama’s request for a longer-term extension “purely political and indefensible” in a blog posting. House Republicans plan a closed-door meeting in the Capitol today.
Representative Ed Markey, a Massachusetts Democrat, called Boehner’s approach unacceptable. “It’s a very cynical, regain- the-majority strategy that puts the entire economy at risk” and ensures another debate next year, he said.
Senate Bob Corker, a Tennessee Republican, said investors should “chill” and not worry that Congress will allow a default to occur.
“I would sort of chill out and not worry so much anymore about the debt ceiling issue,” Corker said on CNBC. “We have a lot of things that we know will keep us from ever defaulting on our debt.”
U.S. stocks fell while gold climbed. The Standard & Poor’s 500 Index slipped 0.5 percent to 1,338.78 at 11:01 a.m. in New York after losing as much as 1 percent earlier. The Dow Jones Industrial Average lost 63.58 points, or 0.5 percent, to 12,617.58. Gold added as much as 1.4 percent to $1,624.07 an ounce.
Treasuries fell after Mohamed A. El-Erian, whose Pacific Investment Management Co. runs the world’s biggest bond fund, said the U.S. may lose its AAA debt rating even if lawmakers reach a plan to avoid a default.
Ten-year yields increased six basis points to 3.02 percent. They rose six basis points last week, reaching 3.04 percent on July 21, the highest level since July 11, still below the 10- year average of 4.05 percent.
El-Erian said in an interview today on Bloomberg Television that it will be a “big, big mess” if the U.S. defaults, spurring a sell-off in equities, the U.S. dollar and commodities excluding gold. El-Erian is the Newport Beach, California-based chief executive officer and co-chief investment officer at Pimco.
“Remember there is no other country that can step in to replace the U.S.,” he said. “The U.S. is the supplier of the reserve currency. The U.S. is the provider of a financial system that intermediates other people’s savings and investments. The U.S. is a AAA. The question is whether the U.S. can maintain a AAA.”
Christian Cooper, head of U.S. dollar derivatives trading in New York at Jefferies & Co., said markets view a two-stage plan as a “non-starter because we now know it is amateur hour on Capitol Hill and we don’t want to be painted in this corner again.”
“There is significant risk of a downgrade with a deal that ties further cuts to another vote only a few months down the road given the significant resistance to do the right thing now,” Cooper said.
The collapse July 22 of the quest by Obama and Boehner for a deal to slice as much as $4 trillion from the long-term debt through overhauls of entitlement programs and the tax code left all sides staring at a crisis with no clear path forward and little time to spare.
Obama met in the Oval Office yesterday with Reid, of Nevada, and House Democratic Leader Nancy Pelosi of California and all three reaffirmed their opposition to a short-term debt- limit increase.
Boehner told Republicans in a conference call yesterday that no one is willing to default on the full faith and credit of the U.S., according to a person familiar with the conversation who described it on condition of anonymity.
The Obama administration criticized House Republican leaders today for backtracking on their position just weeks ago.
Pfeiffer wrote that in June House Majority Leader Eric Cantor supported a single package leading to a debt ceiling increase.
“Now House Republicans are arguing that we should adopt multiple short-term solutions,” Pfeiffer wrote. “That would leave that cloud of uncertainty hanging over our economy continually for the next two years, if not longer.”
A spokesman for Cantor, Brian Patrick, said in an e-mail the Virginia Republican shifted his position as he “tried to find a middle ground” to avoid default.
And Kevin McCarthy of California, the third-ranking House Republican, said on Bloomberg TV that among his caucus, “I don’t see a lot of people jumping for joy on the Reid plan.” He said, “It has the same old Washington gimmicks.”
Treasury Secretary Timothy Geithner said there was no other option than raising the debt ceiling. “The only way to limit the damage to the American people that would come from Congress failing to act is for Congress to act to raise the debt limit,” Geithner said on ABC’s “This Week.” Congress is “going to pass the debt limit increase. That’s what they’re going to do.”
Congressional leaders are battling the calendar. Boehner has told Republicans privately that the House would probably need to act on a debt-ceiling measure by July 27 to allow time to pass it, send it to the Senate, where procedural tactics could stall it for days, and get it cleared for Obama’s signature in time to meet the Aug. 2 deadline. That would mean introducing a bill today to comply with House rules that require legislation to be publicly available for three days before it comes up for a vote.
A Republican aide involved in the talks said Reid had been open to Boehner’s approach -- backed by Senate Minority Leader Mitch McConnell of Kentucky -- of providing a short-term borrowing increase accompanied by a greater amount of spending cuts, then charging a committee to find long-term debt savings before the rest of the increase could be considered. Reid presented it to Obama at the White House and the president wouldn’t agree, the aide said.
The conflict carried political peril for both parties. Boehner is laying the groundwork for the task of corralling Republicans -- including the Tea Party-supported freshmen who swept him into power in campaigns that spotlighted their zeal for spending cuts -- to back a debt-ceiling increase that is likely to contain far smaller reductions than they favor.
The debt-limit showdown was shaping up as a test of Republican solidarity, and Boehner urged his rank-and-file during yesterday’s afternoon conference call to stick together to maximize their leverage against Obama, even though the plan might require some of them to make sacrifices.
‘Game of Chicken’
“It’s not a game of chicken,” Representative Bill Huizenga, a Michigan Republican, said in an interview following the call. “People are looking for the speaker to come back with something significant. There is an agreement to be found, we just haven’t found it yet. People are willing to give the speaker some leeway.”
Obama was consigned largely to the sidelines as Boehner, Reid and their counterparts in the opposing parties struggled to assess what could pass the House and Senate. Recent polls have shown that the public is on the president’s side in the debt- limit debate, trusting him more than Republicans and favoring his call for increasing taxes on the wealthy while opposing the spending cuts Republicans have demanded.
A CNN/Opinion Research Poll July 18-20 found that 52 percent believe Obama has behaved responsibly in the debt ceiling talks, compared with 46 percent who don’t. Two-thirds said Republicans hadn’t. In the poll of 1,009 adults, 51 percent said they’d blame Republicans if the debt ceiling weren’t raised, compared with 30 percent who would blame Obama. It had a margin of error of plus or minus 3 percentage points.
Yet the president also has much at stake in the event of a debt-limit disaster at a time when the public is already unhappy with his performance and handling of the economy. According to Gallup, 43 percent approve of the job Obama is doing while 49 percent disapprove.
--With assistance from Catherine Dodge, Peter Cook, Margaret Talev, Julianna Goldman, Brian Faler, Kate Andersen Brower, Laura Litvan, Mike Dorning, Heidi Przybyla, Kasia Klimasinska and Roger Runningen in Washington and Bob Burgess, John Detrixhe, and Rita Nazareth in New York and Steve Voss in London. Editors: Laurie Asseo, Robin Meszoly
To contact the reporters on this story: Julie Hirschfeld Davis in Washington at Jdavis159@bloomberg.net; Laura Litvan in Washington at firstname.lastname@example.org.
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