Democrats Balk at Potential U.S. Debt-Limit Deal

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Photographer: J. Scott Applewhite/AP

Senate Majority Leader Harry Reid of Nev., speaks to reporters following the Democrats' weekly policy meeting on Capitol Hill July 19, 2011.

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Photographer: J. Scott Applewhite/AP

Senate Majority Leader Harry Reid of Nev., speaks to reporters following the Democrats' weekly policy meeting on Capitol Hill July 19, 2011. Close

Senate Majority Leader Harry Reid of Nev., speaks to reporters following the Democrats' weekly policy meeting on... Read More

Photographer: Tom Williams/Roll Call/Getty Images

House Minority Whip Steny Hoyer, D-Md., right, and Gov. Martin O'Malley, D-Md., speak after a Democratic Whip meeting in the Capitol Visitor Center on the need to reach an agreement on debt reduction. Close

House Minority Whip Steny Hoyer, D-Md., right, and Gov. Martin O'Malley, D-Md., speak after a Democratic Whip meeting... Read More

Photographer: Harry Hamburg/AP

From left, Reps. Stan Honda, D-Calif., Charles Gonzalez, D-Tex. and Raul Grijalva, D-Ariz., attend a minority caucuses news conference on Capitol Hill, July 20, 2011. Close

From left, Reps. Stan Honda, D-Calif., Charles Gonzalez, D-Tex. and Raul Grijalva, D-Ariz., attend a minority... Read More

Photographer: Joshua Roberts/Bloomberg

U.S. President Barack Obama. Close

U.S. President Barack Obama.

Democrats reacted angrily to reports that the White House is cutting a deal with House Republicans to boost the U.S. debt ceiling and reduce deficits by about $3 trillion over 10 years without immediate revenue increases.

President Barack Obama’s team has told congressional leaders it is pursuing such a deal, according to two officials familiar with the talks, as the White House and House Speaker John Boehner of Ohio denied one was at hand.

The officials, who described outlines of the plan on condition of anonymity, said the leaders were told it would cut spending while calling for a future tax overhaul that could raise $1 trillion in additional revenue.

Obama met with Democratic leaders from the House and Senate at the White House for about two hours.

The administration and House Republicans remain divided over the fate of the cuts for top earners passed during President George W. Bush’s administration and how much revenue would be raised to trim the long-term federal deficit, said two Democratic officials familiar with the negotiations.

Obama wants spending cuts to be gradual, with the fullest effects not felt until 2014 and beyond, to avoid shaking the still-fragile recovery, the officials said, briefing reporters on condition of anonymity to discuss the closed-door talks.

While discretionary spending cuts could be immediate, changes in the tax code and entitlement programs would be worked out over the next year, the officials said.

Aug. 2 Deadline

Little more than a week is left before the Aug. 2 deadline for raising the $14.3 trillion debt ceiling and averting a default. Negotiations for a deficit-cutting deal to set the stage for raising the cap were moving quickly, and some Democrats said they feared they might be asked to swallow a plan they couldn’t accept: steep reductions in programs including Medicare and Social Security, with no promise of higher tax revenue.

Obama called House Minority Leader Nancy Pelosi, a California Democrat, last night to inform her that he and Boehner were close on the framework of a deal, according to a Democratic official who requested anonymity. The official didn’t say if the size and timing of potential revenue increases were part of the discussion.

Senate Majority Leader Harry Reid of Nevada confronted White House Budget Director Jack Lew about such a possible deal at a closed-door lunch at the Capitol, and Lew said he wasn’t aware of any agreement, according to Senator Joe Lieberman of Connecticut, an independent who caucuses with the Democrats. Some Democrats believe they are being left out as Obama bargains with Boehner, Lieberman said.

New Revenue

Senate Budget Committee Chairman Kent Conrad, a North Dakota Democrat, said a major budget deal that doesn’t include new revenue “obviously” couldn’t pass the Democratic- controlled Senate.

“We are very volcanic at this moment,” Senator Barbara Mikulski, a Maryland Democrat, said as she left the session with Lew. She said Democrats don’t want an agreement similar to last year’s deal between Obama and Republicans that extended Bush-era tax cuts for all taxpayers, including the wealthy.

The news of a potential deal in the debt-limit dispute was first reported today by the New York Times and was quickly denied by White House press secretary Jay Carney. Boehner said in a Twitter message that reports of a deal were “false.” Lew, leaving his session with Senate Democrats, said, “There is no agreement.”

‘No Progress’

“There is no progress to report,” Carney said at a briefing in Washington. He said the administration is “absolutely confident” an agreement to avert a default can be reached before Aug. 2, when the Treasury Department says the U.S. would exhaust its borrowing authority.

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 today 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 forecast short-term interest rates would rise by 50 basis points or 0.50 percentage points and long-term interest rates by 100 basis points or 1 percentage point.

‘Remain Flexible’

Even amid the political debate about the debt in Washington, bond market yields in the U.S. are lower now than when the government was running a budget surplus a decade ago. The yield on the benchmark 10-year note declined two basis points to 3 percent as of 10:46 a.m., Friday, in Tokyo, according to Bloomberg Bond Trader prices.

The rate is below the average of 5.48 percent in 1998 through 2001, the last time the U.S. had a budget surplus, according to Bloomberg Bond Trader prices.

More than 40 House Republicans met today with officials from Standard & Poor’s, the Investment Company Institute and JPMorgan Securities who detailed the economic consequences of a default and encouraged lawmakers to raise the ceiling by Aug. 2.

“We have to remain flexible,” Representative Charlie Dent, a Pennsylvania Republican, said afterward. “Obviously nobody thinks default is an option. We also want to prevent a downgrade.”

Meeting Lawmakers

Boehner plans to meet with rank-and-file House Republicans tomorrow morning to brief them on the status of the talks. Republicans insist that any debt-ceiling boost be accompanied by spending cuts and measures to reduce the long-term debt without raising taxes.

Boehner told reporters he has prepared his membership for the possibility of a compromise with Democrats to raise the debt limit, and that he believed a majority of the 240 Republicans are prepared to do so. “We have a responsibility to act,” he said.

Democrats say more tax revenue must be part of any final compromise.

“The president always talked about balance, that there had to be some fairness in this, that this can’t be all cuts,” Reid told reporters at the Capitol. “There has to be a balance, there has to be some revenue with the cuts. My caucus agrees with that. I hope the president sticks with that. I’m confident he will.”

Forced Deal

Lieberman said Democrats “are anxious that the president is negotiating with Speaker Boehner, and that somehow that an agreement made there will be forced on the Senate.”

At the same time, a bipartisan group of six senators who revived hopes this week for a grand bargain haven’t produced details sought by leaders, making it harder to add their proposals to any debt-ceiling endgame, said two Democratic aides familiar with the deliberations.

The so-called “Gang of Six” outlined a $3.7 trillion deficit-reduction plan and Obama embraced it this week. Some Republicans have endorsed it or signaled openness to considering its elements. The group was meeting with Senate leaders today to determine which of their ideas -- if any -- would offer a way out of the current conflict.

Fallback Plan

Senate leaders have also discussed a fallback plan by Reid and Republican Leader Mitch McConnell of Kentucky to give Obama $2.4 trillion in borrowing authority. It could be combined with spending cuts and a committee charged with pushing through longer-term debt reduction in the coming months.

If S&P were to downgrade U.S. debt following a failure to reach a credible deficit reduction agreement, the market reaction would probably be more severe than the ratings service forecasts, said Christian Cooper, head of U.S. dollar derivatives trading in New York at Jefferies Group Inc., one of 20 primary dealers that trades with the Federal Reserve.

Cooper said long-term Treasury yields could rise by as much as 40 to 50 basis points, or 0.40 to 0.50 percentage points. The ramifications in financial markets would be even broader, he said.

“It is an entirely new world that we would be in to even consider a downgrade of U.S. government debt,” Cooper said. “This is something that would fundamentally change the market’s perception of not only U.S. government solvency but how risky assets around the world are priced as well.”

Democrats and Republicans blamed each other for the stalemate. Reid said the House’s decision to be out of session this weekend presents “a bad picture” to Americans as the deadline nears for possible default on federal debt.

Michael Steel, a spokesman for Boehner, responded with an e-mail saying the House had passed its plan, which would condition a debt-ceiling increase on passage of a constitutional amendment requiring a balanced budget. Democrats say it can’t pass the Senate, which plans to vote on it as early as tomorrow.

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