Obama, Congressional Leaders Said to Focus on Spending Cuts in Debt Talks

President Barack Obama and congressional leaders are pushing ahead with deficit-reduction talks as some lawmakers in both parties express skepticism about a fallback plan by Senator Mitch McConnell to raise the debt ceiling.

The bipartisan negotiating group, meeting for the fourth straight day at the White House, is focusing on a narrow group of spending cuts -- identified during seven weeks of talks led by Vice President Joe Biden -- in an attempt to work out at least a $2 trillion debt-cutting plan, said a Republican aide who spoke on condition of anonymity.

The slow progress, as the Aug. 2 date when the government is projected to exhaust its borrowing authority inches closer, prompted McConnell, a Kentucky Republican, to propose yesterday a “last-choice” plan that would give Obama unilateral power to raise the national debt ceiling.

“If everything else fails and everybody’s great ideas don’t come to pass, and it’s the day before Aug. 2, something has to be done,” said Senator Jon Kyl of Arizona, the chamber’s second-ranking Republican. “Somebody has to have a plan for that eventuality, and that’s what Senator McConnell has put out there.”

Kyl held two fingers a centimeter apart when asked today how much the two parties’ proposed spending cuts overlap. The White House has warned for months that a default resulting from a failure to raise the $14.3 trillion debt limit would be a catastrophe for the economy.

Photographer: Joshua Roberts/Bloomberg

President Barack Obama speaks during a news conference about deficit cuts in the Brady Press Briefing Room at the White House in Washington, D.C., on July 11, 2011. Close

President Barack Obama speaks during a news conference about deficit cuts in the Brady... Read More

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Photographer: Joshua Roberts/Bloomberg

President Barack Obama speaks during a news conference about deficit cuts in the Brady Press Briefing Room at the White House in Washington, D.C., on July 11, 2011.

Possible Downgrade

In a sign of concern within the financial community, the U.S. had its Aaa bond rating placed on review for possible downgrade by Moody’s Investors Service, which cited the “rising possibility” that the debt limit won’t be upped on a timely basis.

“There is a small but rising risk of a short-lived default,” Moody’s said.

House Speaker John Boehner, an Ohio Republican, said today that “what happens if the debt limit is not increased is a ‘crapshoot’ -- no one knows, and we don’t want to find out,” according to his spokesman, Michael Steel,

Default “destroys your brand and would give the president an opportunity to blame Republicans for a bad economy,” McConnell, of Kentucky, told radio host Laura Ingraham today. He also predicted that with the two sides at an impasse on how best to reduce the deficit, there would be no Republican support in the House or Senate for raising the debt ceiling. “I’ll bet there won’t be a single Republican vote” for it, he said.

Three-Step Plan

McConnell’s proposal would let the president increase the limit in three steps unless Congress disapproved by a two-thirds majority -- a near impossibility, given the number of Democrats in both the House and Senate -- while Obama would also be required to offer spending reductions. It would let the president raise the debt limit while putting the onus on him and congressional Democrats to cut spending.

Obama “owns the economy” after nearly three years in office, said McConnell, “and we refuse to let him entice us into co-ownership of a bad economy.”

The increases would come in amounts of $700 billion, $900 billion and $900 billion, McConnell said. They would occur over the remainder of Obama’s presidential term, in keeping with the president’s call for an increase in the debt limit that would carry through the 2012 elections.

Lawmaker Opposition

While the proposal gave some market analysts confidence that the U.S. will avert default, Republicans including Senator Tom Coburn of Oklahoma and Democrats including Senator Kent Conrad of North Dakota rejected it as a political hoax that fails to address the debt.

Leaders from both parties in the House and Senate either offered cautious praise or held back from publicly criticizing the plan.

“It would make it much easier to raise the debt limit, which should reassure markets,” Gus Faucher, director of macroeconomics at Moody’s Analytics in West Chester, Pennsylvania, said in response to an e-mail today.

Conrad, chairman of the Senate Budget Committee, called the McConnell plan “one of the worst ideas I have ever heard.” Any plan that extends the debt limit without doing anything about the debt “is an abdication of responsibility that is stunning,” he said.

‘Don’t Hunt’

“That dog don’t hunt,” said Representative Allen West, a freshman Republican from Florida. “Seems like an acquiescence to me.”

The proposal’s chances of passing the Republican-controlled House are unclear because of objections from Tea Party-backed freshman Republicans such as West. Still, Mark Zandi, chief economist at Moody’s Analytics, said markets are comforted, at least to a degree, because the plan suggests that lawmakers recognize the gravity of a default.

“As soon as I heard that, I thought, well, that’s positive,” Zandi said in an interview.

Ethan Siegal, who tracks Washington policy for institutional investors, said McConnell’s plan adds to “the market’s already decided certainty” that there will be some resolution that prevents a default of government obligations.

“Investors firmly believe it’s going to get done,” said Siegal, who is president of the Washington Exchange.

‘Thoughtful,’ ‘Unique’

Senate Majority Leader Harry Reid, a Nevada Democrat, described McConnell’s proposal as “thoughtful and unique,” even as he called on both sides to pull together on a more ambitious deal. House Minority Leader Nancy Pelosi, a California Democrat, said the plan by McConnell has some “merit” because it recognizes the debt ceiling must be lifted.

A Senate Democratic aide said party leaders see the proposal as a possible vehicle for caps on discretionary spending for the next two years and to create a joint committee that would draft a plan to cut the debt.

The absence of an agreement after several days of talks among congressional leaders and the president suggests a possible breakdown, said analyst Chris Krueger.

Even with McConnell’s alternative, “we are no closer to a deal, votes, or a raise in the debt ceiling with the sand continuing to run out of the hourglass,” Krueger, an analyst at MF Global Washington Research Group, told clients in a note. He said the odds are 40 percent that Congress won’t pass a debt- ceiling bill before the Treasury’s stated Aug. 2 deadline for raising the borrowing limit to avert a U.S. default.

A newsletter to clients from FBR Capital Markets today stated “roughly, a 25 percent probability that a final deal will not be reached by the Aug. 2 deadline.”

Bernanke’s View

Federal Reserve Chairman Ben S. Bernanke told Congress today that a failure by Congress to raise the nation’s $14.3 trillion debt limit would lead to a “major crisis” and throw “shock waves” through the financial system. Bernanke responded to a question at a House Financial Services Committee hearing.

White House spokesman Jay Carney said today that the McConnell plan “is not the preferred option,” although the administration doesn’t reject it out of hand. The White House would prefer a more comprehensive plan, he said.

“Bigger is better,” Carney told reporters.

The White House is holding out hope the president can reach a deficit-reduction deal of $2.5 trillion or larger that includes revenue increases, and they expect other backup proposals between now and Aug. 2, said a Democrat familiar with the negotiations.

Even as politicians haggle over the debt ceiling, government bond yields are at about the lowest this year. The yield on 10-year Treasuries was 2.88 percent as of 5:07 p.m. in New York, according to Bloomberg Bond Trader, after falling to a low this year of 2.81 percent on July 12. That compares with an average of 7 percent during the past four decades.

To contact the reporters on this story: Mike Dorning in Washington at mdorning@bloomberg.net; Heidi Przybyla in Washington at hprzybyla@bloomberg.net

To contact the editor responsible for this story: Mark Silva at msilva34@bloomberg.net

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