House Panel Passes Debt-Cap Bill That Puts Bondholders

With a debt-limit battle looming, Republicans in the U.S. House of Representatives are looking to inoculate themselves against charges they’re willing to risk the government’s credit in order to force spending cuts.

The House Ways and Means Committee today passed a measure intended to ensure that U.S. government bondholders continue to be paid and that Social Security benefits aren’t interrupted even if a stand-off over raising the borrowing cap causes a cash crunch.

“The legislation provides an ironclad plan to avoid the risk of default going forward,” said panel Chairman Dave Camp, a Michigan Republican. The measure was approved on a party-line 22-14 vote.

Congress will need to raise the debt ceiling later this year and Republicans want to avoid a repeat of the 2011 battle that ensued as the previous limit neared. The party was bloodied by complaints that its members were willing to risk default when they demanded spending cuts before raising the cap.

The latest debt-limit increase expires next month, and House Speaker John Boehner, an Ohio Republican, is demanding spending cuts equivalent to any increase. Lawmakers probably won’t have to raise the cap until their monthlong August recess because accounting maneuvers can be used to stave off default for several months.

Bond Payments

The legislation advanced today exempts from the borrowing cap payments to bondholders as well as interest owed to the Social Security trust fund, a move needed to ensure benefits won’t be interrupted. It would leave it up to the Obama administration to decide which of the government’s bills to pay with tax receipts.

The plan is based on the assumption that the government can avoid default if it pays bondholders on time even if payments on bills, such as those from defense contractors, are delayed.

Democrats scoffed, saying even if investors are paid on time, they’ll be spooked by things like bill-payment delays.

“We need to pay our debts -- we should not be saying we’ll pay some but we won’t pay other bills,” Representative Sandy Levin of Michigan, the committee’s top Democrat, told Bloomberg Television. “The full faith and credit, really, of the U.S. is at stake,” he said. “That’s playing with fire.”

The bill is probably doomed in the Democratic-controlled Senate. The legislation is H.R. 807.

To contact the reporter on this story: Brian Faler in Washington at 1919 or bfaler@bloomberg.net.

To contact the editor responsible for this story: Katherine Rizzo at krizzo5@bloomberg.net.

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