With few signs of progress, congressional leaders pressed to devise a plan to avert a U.S. default before financial markets open as President Barack Obama remained opposed to any short-term debt-limit increase.
Obama told lawmakers today at a White House meeting that a short-term extension of the $14.3 trillion debt-limit 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.
Less than 36 hours before markets open in Asia and a day after House Speaker John Boehner withdrew from talks with Obama on a broader deficit-reduction deal, congressional leaders sought to produce a plan that could pass both chambers.
“Over this weekend Congress will forge a responsible path forward,” Boehner, an Ohio Republican, said in a statement after the White House meeting. “House and Senate leaders will be working to find a bipartisan solution to significantly reduce Washington spending and preserve the full faith and credit of the United States.”
Boehner told Republican lawmakers yesterday he would need to introduce legislation by July 27, one lawmaker said, to ensure both chambers could enact it under their regular procedures before Aug. 2, when the Treasury has projected it will exhaust its legal borrowing authority.
Senate Republican leader Mitch McConnell of Kentucky said top lawmakers are “committed” to preventing a U.S. default. House Democratic leader Nancy Pelosi of California said the leaders must “make every moment count.”
With the debt-limit deadline approaching, Obama said at the White House last night 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.
“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.
He made his remarks shortly after hearing from Boehner yesterday that the Republican leader was withdrawing from the efforts the two have pursued to revamp the government’s finances over the next decade.
Weekly performance of Treasuries was down last week for the first time in three weeks, though they rose yesterday 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 percent chance of cutting the U.S. credit rating within three months. Yields on benchmark 10-year notes rose six basis points, or 0.06 percentage point, to 2.96 percent yesterday in New York, from 2.91 percent on July 15, according to Bloomberg Bond Trader prices.
The president didn’t hide his frustration with the turn of events yesterday, 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’
“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.”
“It’s not in the best interest of our country to raise taxes during this difficult economy,” Boehner said. He also expressed frustration, saying that dealing with the White House was like negotiating with a “bowl of Jell-O.”
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 this week.
‘Never Really Close’
Boehner released a letter announcing his withdrawal from talks on a comprehensive package. “A deal was never reached, and was never really close,” he said in the letter. “In the end, we couldn’t connect.”
House Republican leadership aides said the key stumbling block to a deficit-reduction agreement was the dispute over taxes, with the president pressing for more revenue to be raised through a tax-code rewrite than Republicans were willing to accept.
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 bipartisan group used a different baseline to compare revenue than congressional leaders used in the White House negotiations.
The Republican aides said the revenue increase in the bipartisan 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.
Smaller Revenue Increase
The official said release of the bipartisan plan would have made it harder to attract Democratic support for a proposal with a smaller revenue increase. The White House proposed several options, including a lower revenue figure with smaller cuts to entitlement programs, said the official, who provided the details on the condition of anonymity.
Rather than offering any counterproposals, Boehner’s team broke off communication, the official said.
The collapse in the talks was the second time Boehner broke off negotiations. The speaker withdrew on July 9 from earlier rounds of private discussions after word leaked to the media about the potential deal and fiscally conservative members of his party balked.
Blame for Impasse
Obama at his news conference sought to put the blame for the latest impasse squarely on House Republicans, who took control of the chamber in last November’s elections and whose ranks include scores of Tea Party-backed freshmen. Obama said Democrats were willing to make “tough compromises,” while among the Republicans, “there doesn’t seem to be a capacity for them to say yes.”
Entitlement cuts Obama tentatively accepted included a change in the way the cost-of-living adjustment is computed for Social Security recipients that would lower annual benefit increases, administration officials said.
David Beers, Standard & Poor’s global head of sovereign and international public finance, said in an interview today, “We’ll look at what is agreed when it’s agreed and judge it in light of the principles we put down when we put the U.S. on credit watch.”
Standard & Poor’s
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 yesterday 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, which could come as soon as early August, would “modestly raise” the federal 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 by 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 yesterday. The government has collected about $14 billion more in tax revenue since July 14 “than we were expecting,” the analysts wrote.
In U.S. markets that closed before the Obama-Boehner talks collapsed, the S&P 500 rose 0.1 percent to 1,345.02 at 4 p.m. in New York and gained 2.2 percent this week. The Dow Jones Industrial Average dropped 43.25 points, or 0.3 percent, to 12,681.16. Gains in technology stocks pushed the Nasdaq-100 Index up 1.1 percent to the highest level since February 2001.
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