Republicans prepared to force action on a shorter-term extension of the U.S. debt limit than President Barack Obama has requested, defying a veto threat amid warnings that continued stalemate risks roiling financial markets as soon as tonight.
The president would veto a measure to raise the debt ceiling if it doesn’t extend the limit into 2013, White House Chief of Staff Bill Daley said in an interview on NBC’s “Meet the Press.” Daley warned that “markets around the world” would react negatively to a short-term measure offering less than $2.4 trillion in borrowing authority.
“We’ve got to get past this debt-ceiling vote,” Daley said. “It’s time to get some certainty.”
House Speaker John Boehner, an Ohio Republican, said while he’d prefer a compromise package, his party was “prepared to move on our own” if that proved impossible. He aims to announce a framework -- bipartisan or not -- later today to try to minimize uncertainty before Asian markets open, he said on Fox News.
Boehner scheduled a 4:30 p.m. conference call with Republicans.
A Republican congressional aide said yesterday that Boehner is seeking a two-step plan to slash a total of $3 trillion over a decade. It would provide an immediate, stopgap borrowing boost tied to the same amount of spending cuts, and future votes on further spending reductions tied to the remainder of the debt- limit increase.
“There will be a two-stage process,” Boehner said on Fox. “This is about what is doable at the 11th hour.”
The speaker was in his Capitol office suite with only hours left before Asian markets were to open for the first time since Boehner announced the collapse of his talks with Obama on a broad debt deal.
Senator Jon Kyl of Arizona, the second-ranking Republican, challenged Obama to reconsider his opposition to a short-term extension. “I can’t imagine that he would sacrifice the creditworthiness of the United States just because he doesn’t want to deal with this during his election campaign,” he said in an interview on CBS.
Still, Democrats argued a smaller boost would stir up financial markets and wreak further havoc on an already weak economy struggling to recover.
“A short-term extension of the debt ceiling is going to jeopardize our economy,” Senator Dick Durbin of Illinois, the second-ranking Democrat, said on CBS. “We can’t do that.”
Durbin said Boehner is “ignoring” the warnings of credit rating companies that have said they may downgrade U.S. debt if Congress fails to enact a long-term plan to address deficits. “The American economy is too fragile at this point in the recovery to allow that to happen,” Durbin said.
Treasury Secretary Timothy F. Geithner said Congress would act to boost the borrowing limit, and warned he has no ability to insulate Americans from the tumult that would result if lawmakers were unable to come to terms to do so. The government sends 80 million checks a month to the military and beneficiaries of Social Security, Medicare and Medicaid.
“We do not have the ability to minimize the damage on them,” he said in an interview on Fox. “Only Congress has the ability to make sure people get their checks on time.”
Daley said the U.S. is now approaching the point where “markets around the world will question whether the political system can come together and compromise.”
He endorsed an approach under consideration by Senate Minority Leader Mitch McConnell, a Kentucky Republican, and Senate Majority Leader Harry Reid to allow Obama to raise the debt ceiling without congressional approval. “It would not be this sword being held over the American people’s heads once again,” he said.
That plan faces opposition by fiscally conservative lawmakers because it wouldn’t require any spending cuts to be made as a condition of raising the debt limit.
The markets could turn tumultuous if a plan isn’t negotiated over the weekend, said Christian Cooper, head of U.S. 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 U.S. Federal Reserve.
Republican Senator Tom Coburn of Oklahoma, a member of the so-called Gang of Six that negotiated a debt-reduction proposal, urged House Republicans in the Tea Party caucus to remain open to a compromise that -- like the one his group unveiled July 19 -- could involve narrow tax increases that don’t impact most Americans, coupled with entitlement and discretionary spending reductions.
“Ideally we would not have tax increases,” Coburn said on NBC’s “Meet the Press” program. “But to get a deal, if we eliminated ethanol blending tax credits, wind energy tax credits, tons of other tax credits, then we could get a deal and what that would not do is impact the average American, would not raise rates.”
Geithner told congressional leaders meeting with Obama at the White House yesterday that delaying a deal risked an adverse reaction from credit-rating companies and financial markets.
Boehner also signaled danger, telling Republican lawmakers in a conference call yesterday 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.
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.
New York Mayor Michael Bloomberg said that while the U.S. would find a way to “pay people and get government going again” if there were a default, it would create a doubt that’s difficult to erase.
“It’s one seismic event that says you can never depend 100 percent on America’s word anymore,” Bloomberg said on ABC’s “This Week.”
The mayor is the founder and majority owner of Bloomberg News parent company Bloomberg LP.
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 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 July 22 in New York, from 2.91 percent 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 percent during the past decade.
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.
© Copyright 2017 Bloomberg News. All rights reserved.