July 31 (Bloomberg) -- President Barack Obama said tonight that leaders of both parties in the U.S. House and Senate had approved an agreement to raise the nation’s debt ceiling by $2.1 trillion and cut the federal deficit by as much as $2.5 trillion over a decade, a deal that must now be sold to Congress.
“The leaders of both parties in both chambers have reached an agreement that will reduce the deficit and avoid default,” Obama said at the White House. “This compromise does make a serious down payment on the deficit-reduction we need. Most importantly it will allow us to avoid default.”
Congressional leaders reached a bipartisan agreement to raise the debt ceiling by at least $2.1 trillion, sufficient to serve the nation’s needs into 2013. They are preparing to sell to members the deal to cut $917 billion in spending over a decade, raising the debt limit initially by $900 billion, and to charge a special committee with finding another $1.5 trillion in deficit savings by the year’s end. They confront an Aug. 2 deadline for approval of the agreement.
“This goes a long way to reducing the risk of default by the U.S. government,” Tom Quarmby, head of regional banking research at Barclays Capital in Hong Kong, said in a Bloomberg Television interview. While many hurdles remain, the deal “gets them out of a lot of trouble in the near term,” he said.
The dollar and oil prices climbed, and gold fell. U.S. currency rose 1.3 percent to 77.79 yen and 0.2 percent to $1.4376 per euro at 9:44 a.m. in Tokyo. Gold slid 1.1 percent to $1,610.70 an ounce. Crude oil for September delivery rose 1.6 percent to $97.19 a barrel on the New York Mercantile Exchange.
Futures on the benchmark Standard & Poor’s 500 Index of stocks ended a seven-day losing streak, gaining 1.5 percent to 1,308 as of 10:54 a.m. in Tokyo.
With just two days left before the Treasury Department had said the nation would default without additional borrowing authority, both sides made concessions. Republicans dropped their insistence on withholding some of the borrowing authority until future spending cuts had been made and a balanced budget amendment to the Constitution had been passed by Congress.
The White House agreed to forgo an automatic tax increase as one of the consequences to kick in if no debt-reduction law is enacted by Christmas.
Obama has an opportunity to increase revenue in the future if he opts to allow tax cuts enacted under George W. Bush to expire as scheduled in 2013. Even if Obama lost his re-election campaign next year, he could veto legislation to extend those cuts before leaving office -- raising $3.5 trillion.
Shortly before Obama spoke, Senate Majority Leader Harry Reid and Minority Leader Mitch McConnell took to the Senate floor to endorse the accord. Reid said “reasonable people” were able to agree on a deal and the nation and Congress were “moving forward together.” Reid, of Nevada, said Senate Democrats would meet tomorrow at 11 a.m. to discuss the package.
The agreement calls for cutting $917 billion over a decade and immediately raising the debt limit by $900 billion, then forming a special congressional committee to find another $1.5 trillion in deficit savings by year’s end, according to a summary Speaker John Boehner circulated to House Republicans.
If the super-committee’s work failed to yield at least $1.2 trillion in debt reduction, sweeping automatic spending cuts would go into effect. These would inlcude cuts in defense programs and Medicare, although other programs -- including Social Security, Medicaid veterans, and civil and military retirement -- would be exempted. Cuts to Medicare spending would only affect provider reimbursement rates, not benefits, and would be limited to 2 percent.
In a nod to fiscally conservative and Tea Party-aligned lawmakers who wanted to condition any borrowing boost on passage of a balanced-budget amendment to the Constitution, the measure calls for a vote of both houses of Congress on such a measure sometime after Oct. 1 and by the end of the year.
It would allow Obama to ask for the second debt-ceiling increase after the super-committee’s deficit-reduction recommendations were enacted or after the constitutional amendment was sent to the states.
Still, even if neither of those things happened, Obama would be able to get the remaining $1.5 trillion debt-ceiling extension and the automatic spending cuts would go forward.
Congress could try to block the borrowing increase with a disapproval resolution, yet would almost certainly fail to muster the two-thirds majorities in the House and Senate to override the president’s veto.
Boehner, of Ohio, apologized to rank-and-file Republicans in a conference call for having to rush the measure to the floor as soon as possible, while telling them it represented a victory over Obama and his debt-ceiling demands, according to a Republican aide familiar with the discussion.
Boehner said he had forced Obama to give up his initial demand for a “clean” borrowing increase -- one without anything attached -- as well as his later call for a “balanced package” that included revenues as well as spending cuts to shrink the deficit. The deal, Boehner said, is all spending cuts and has nothing that violates Republicans’ principles.
Both sides encountered resistance to the accord from within their own ranks.
Republican Senator Ron Johnson said he was “highly concerned” about the size of the cuts, saying they were too small to make a real difference in reining in the debt.
Not a ‘Fix’
“I’m afraid this is not going to fix the problem, and that’s the one reason I came here,” said Johnson, a first-termer elected with Tea Party support.
Socially liberal groups and lawmakers expressed anger at the package because it omits revenue increases while cutting deeply into government spending and threatening still more reductions to safety-net programs such as Medicare.
“This deal does not even attempt to strike a balance between more cuts for the working people of America and a fairer contribution from millionaires and corporations,” Representative Raul Grijalva, the Arizona Democrat who leads the Progressive Caucus, said in a statement. “I will not be a part of it.”
Obama and congressional Democrats have insisted that any deal be a “balanced approach” that includes revenue, raising questions about whether the president would find substantial support from his party for the plan.
While the compromise shaping up will probably assuage immediate concerns about default in financial markets, “this relief will be short,” said Mohamed A. El-Erian, chief executive officer of Pacific Investment Management Co., the world’s largest manager of bond funds.
If Standard & Poor’s “sticks to what it said, it will downgrade” the U.S. debt following the deal, El-Erian said in an interview on ABC News “This Week.”
S&P, which has given the U.S. a top AAA ranking since 1941, said on July 14 that the chance of a downgrade within three months is 50 percent, and a reduction may occur as soon as August if there isn’t a “credible” plan to reduce the nation’s deficit.
The agreement “does nothing to restore household and corporate confidence, so unemployment will be higher than it would have been otherwise,” El-Erian said. “Growth will be lower than it would be otherwise. And inequality will be worse than it would be otherwise.”
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