Boehner Fights Internal Strife on Veto-Threatened Debt Plan

House Speaker John Boehner
House Speaker John Boehner. Photographer: Brendan Hoffman/Bloomberg

House Speaker John Boehner, battling resistance from within his own party as he intensifies a debt-ceiling standoff with President Barack Obama, worked to salvage his plan to tie the nation’s borrowing power to spending cuts and budget controls.

With less than a week before a possible default, the Republican-led House remained on a collision course with the Senate and the White House. The non-partisan Congressional Budget Office said both chambers’ debt-cutting plans fall short of promised savings. Senate Majority Leader Harry Reid’s plan would save $2.2 trillion over 10 years, short of its $2.7 trillion goal, the CBO said today.

Boehner postponed today’s scheduled House vote on his two-step plan to raise the debt limit, which the White House said Obama would veto, after the CBO said it would save just $850 billion rather than the advertised $3 trillion.

“We are glad Congress’s budget referee agrees that the Senate bill cuts the deficit by $1.3 trillion more than Speaker Boehner’s bill,” said Reid spokesman Adam Jentleson. “It becomes clearer by the hour that the Senate bill is the only true compromise in Congress.”

Treasuries pared losses today as Pacific Investment Management Co.’s Mohamed A. El-Erian said there will be “massive consequences” if the U.S. loses its AAA credit rating. The benchmark 10-year note yielded 2.96 percent. Stocks fell also, pulling the Standard & Poor’s 500 Index lower for a third day.

‘Work to Do’

Boehner, an Ohio Republican who devised his plan after his debt-reduction negotiations with Obama and congressional Democrats broke down, said yesterday, “We’re going to have some work to do to get it passed, but I think we can do it.”

Adding to Boehner’s woes, Republican presidential candidate Michele Bachmann, a Minnesota congresswoman who has said she won’t back raising the debt ceiling, opposed Boehner’s plan. “The premise is wrong that we begin with increasing the debt ceiling,” she told reporters yesterday in Ankeny, Iowa.

Reid’s budget-cutting plan, according to the CBO report, falls $200 billion below the $2.4 trillion figure needed to meet demands that a debt-limit extension through next year’s elections be accompanied by an equal amount of savings. The Senate plan would save more than $1 trillion through what Republicans call a budget gimmick related to a quirk in how CBO forecasts war costs, according to the analysis.

Budget Committees

Both Reid and Boehner proposed creating a special budget-cutting committee to help find cuts, for which the CBO refused to credit any savings because it couldn’t predict whether or how much the panels would eventually agree to cut.

Three investment firms -- BlackRock Inc., Loomis Sayles & Co. and Franklin Templeton Investments -- said the U.S. faces losing its AAA credit rating as the debate continues.

“Our guess is, when push comes to shove, the debt ceiling will be raised,” said Bob Doll, chief equity strategist at New York-based BlackRock, which manages $3.66 trillion. “What goes along with that is very difficult to tell, and that’s why the threat of a downgrade still exists,” Doll said in an interview today on Bloomberg Television.

Richard Durbin of Illinois, the Senate’s second-ranking Democrat, called the debt crisis “a self-inflicted wound.”

“Rating agencies have told us it’s not only a long-term debt, but the fact that you are lurching day to day, week to week, with no resolution on the debt ceiling” that is leading to a potential downgrade of the AAA credit rating, he said on Bloomberg Television today.

Treasury Notes

Yields on five-year Treasury notes increased four basis points, or 0.04 percentage point, to 1.52 percent at 9:16 a.m. in New York, according to Bloomberg Bond Trader prices. The 1.5 percent security due in June 2016 fell 5/32, or $1.56 per $1,000 face amount, to 99 30/32.

Benchmark 10-year note yields advanced four basis points to 2.99 percent. That compares with a 4.06 percent average over the past decade. Thirty-year bond yields were up three basis points to 4.31 percent.

The Standard & Poor’s 500 Index lost 1.4 percent to 1,313.79 at 10:23 a.m. in New York. The S&P has lost more than 2 percent this week as lawmakers moved no closer to reaching an agreement before an Aug. 2 deadline. The cost of insuring against default on Treasuries climbed to the highest since February 2010. Gold traded at a record $1,628.05 an ounce as investors sought haven assets.

Stick Together

In Washington, House Republican leaders implored their rank-and-file to stick together. About 20 Republicans have publicly said they oppose the measure or were leaning toward voting “no,” leaving little wiggle room for passing the legislation. The bill needs 217 votes to pass the House, and Republicans hold 240 seats; they can afford only 23 defections.

No Democrats plan to support the plan, according to a Democrat familiar with the negotiations.

Boehner’s measure had been designed to raise the debt ceiling $900 billion while cutting $1.2 trillion in spending over a decade, then tie a subsequent, $1.6 trillion borrowing increase early next year to enactment of a package slicing $1.8 trillion from the long-term debt.

Under the CBO savings analysis, Boehner’s plan would violate his promise that any debt-limit boost be smaller than the cuts accompanying it. The CBO didn’t count the $1.8 trillion in debt savings, saying it couldn’t predict whether the joint congressional committee the measure establishes would be able to produce them.

Some fiscal conservative groups and lawmakers were in revolt, saying the plan would do too little to slice the debt and control federal spending.

‘Dead on Arrival’

Reid has called Boehner’s plan “dead on arrival” in the Senate. Durbin said today on Bloomberg Television that “it’s likely” Reid’s plan will be changed to win some Republican support. Sixty votes are needed for passage, and the Democrats control 53 votes.

The Boehner plan would promise another debt-limit showdown in the 2012 election year unless Republicans and Democrats agree by the end of this year end to reduce deficits.

Obama endorsed Reid’s proposal as “a much better path,” though it doesn’t include the tax revenue increase that the president said is needed to address the deficit. He criticized Boehner’s plan as “kicking the can further down the road.” He said the two sides need to arrive at “a fair compromise.”

Obama, who wants a $2.4 trillion boost in the $14.3 trillion debt ceiling -- enough to last until after the November 2012 elections -- has said the two-stage approach is unacceptable. It would leave uncertainty in the markets and jeopardize the fragile economy, he maintains. His advisers would recommend he veto the House bill, according to a statement yesterday by the White House Office of Management and Budget.

Aug. 2 Deadline

The Treasury Department has said Congress must act by Aug. 2 to raise the debt ceiling or the nation will default. That would take a compromise that hasn’t materialized in months of bipartisan negotiations.

Majority Leader Eric Cantor of Virginia told House Republicans that he understood the debt-limit vote was difficult, yet the alternatives to Boehner’s plan are worse, according to a Republican official familiar with his remarks.

Cantor said its defeat would leave lawmakers facing the choice of a default or legislation that would hand Obama unilateral authority to raise the debt ceiling without making any spending cuts, Kingston said.

Republican Divisions

Still, there is growing uneasiness among some Republicans about Boehner’s plan. Several conservative organizations, including the Club for Growth, Heritage Action, and the Tea Party-affiliated FreedomWorks, are opposing the plan and pressuring lawmakers to do the same. They said the measure fell short because it doesn’t make congressional passage of a balanced budget amendment to the Constitution a prerequisite to raising the debt ceiling.

“The real key is not raising the debt ceiling, it’s taking care of the long term, getting a solution to the debt crisis, and I’m not sure this qualifies,” Representative Paul Gosar of Arizona, a first-term Republican, said in an interview. “This isn’t reforming the process.”

And business groups leaned on lawmakers to approve the plan.

“This legislation is critical,” R. Bruce Josten, the top lobbyist for the U.S. Chamber of Commerce, wrote in a letter to lawmakers announcing his organization would count the bill as a key vote. “Default on debt obligations is not an acceptable option. The time for Congress to act is now.”

$100 Billion a Year

A loss of the U.S. AAA credit rating would add $100 billion a year to government costs while dragging down economic growth, according to Wall Street bond dealers.

A U.S. credit-rating cut would likely raise the nation’s borrowing costs by increasing Treasury yields by 60 to 70 basis points over the “medium term,” JPMorgan’s Terry Belton said on a conference call hosted by the Securities Industry and Financial Markets Association. Standard & Poor’s, which has given the U.S. a top ranking since 1941, reiterated on July 21 that the chance of a downgrade is 50 percent in the next three months and may happen as soon as August.

“That impact on Treasury rates is significant,” Belton, global head of fixed-income strategy at JPMorgan, said during the call. “That $100 billion a year is money being used for higher interest rates, and that’s money being taken away from other goods and services.”

‘Balanced’ Solution

Obama has pressed for a “balanced” solution to the debt-ceiling debate, including both new revenue and cuts in spending. House Republicans say they won’t accept taxes. The co-chairmen of the bipartisan deficit commission that Obama appointed last year recommended a mix of revenue and spending cuts as the only meaningful way to address the long-term budget-deficit problem.

The percentage of taxes as a percentage of the nation’s gross domestic product, at 15 percent, is at its lowest point since 1950.

A $3.7 trillion deficit-cutting plan by a bipartisan group of senators known as the “Gang of Six,” also called for spending cuts combined with a tax overhaul that would raise $1 trillion.

Reduced government spending could subtract 1.5 percentage points to 2 percentage points from growth in 2012, a drag that will make it difficult to reduce 9.2 percent unemployment, say economists at Bank of America Merrill Lynch, JPMorgan Chase & Co. and Deutsche Bank AG.

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