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Shutdown Seen Merging With Debt-Limit Fight Amid Impasse

President Barack Obama
President Barack Obama said yesterday, “My basic message to Congress is this. Pass a budget; end the government shutdown; pay your bills; prevent an economic shutdown; don’t wait; don’t delay; don’t put our economy or our people through this any longer.” Photographer: Win McNamee/Getty Images

The partisan battles over the U.S. government shutdown and a potential debt default are beginning to merge into a single fiscal fight, raising the stakes for Republicans and Democrats to end the impasse.

Lawmakers from both parties are linking the two issues more closely, a connection the White House is reinforcing, according to an administration official who asked for anonymity to discuss strategy. President Barack Obama met today with financial industry executives to focus attention on the risk of a default.

With no immediate progress on resolving the federal closure, the standoff over funding the government is increasingly likely to continue as a deadline closes in to raise the debt limit. Treasury Secretary Jacob J. Lew yesterday repeated the warning that the U.S. will exhaust its borrowing authority on Oct. 17, in a letter to House Speaker John Boehner.

“There’s no doubt in my mind now that the debt ceiling and shutdown are conjoined in one big tar baby,” said Steve Bell, a onetime Republican Senate budget aide and now a senior director at the Bipartisan Policy Center in Washington.

Stocks Fall

Recognition of the strengthening linkage rippled through financial markets this morning, as stocks slid around the world and gold rallied. The dollar fell, while Treasuries rose.

The MSCI All-Country World Index dropped 0.3 percent at 11:43 a.m. in New York and the Standard & Poor’s 500 Index slid 0.5 percent. The 10-year Treasury yield fell five basis points to 2.60 percent. The dollar weakened versus nine of 16 major currencies.

“Near-term risk aversion could spark a temporary pullback,” Russ Koesterich, the chief investment strategist at New York-based BlackRock Inc., said in an e-mailed statement. His company manages $3.9 trillion of assets. “The battle over debt ceiling is a more important issue and a more significant potential risk.”

Each side in the fiscal fight has reason to believe the approach of the debt limit provides more leverage. Republicans can argue that Obama fears a default more than a shutdown, and the White House can use the prospect of a default to portray Republicans as irresponsible and bring pressure on them through party allies in the business world.

‘Don’t Wait’

Obama, who summoned the top four leaders of Congress to the White House today for the first high-level talks on reopening the government and raising the debt ceiling, combined the two issues in remarks in the Rose Garden yesterday.

“My basic message to Congress is this,” Obama said. “Pass a budget; end the government shutdown; pay your bills; prevent an economic shutdown; don’t wait; don’t delay; don’t put our economy or our people through this any longer.”

In Republican congressional leaders’ own media event, staged sitting on one side of a table in the Capitol to signify their willingness to enter into talks, House Budget Committee Chairman Paul Ryan of Wisconsin described the debt limit as the likely catalyst for a deal.

“That’s what we think will be the forcing action to bring the two parties together,” Ryan said.

The Senate’s second-ranking Democrat, Dick Durbin of Illinois, said the standoffs over funding the government and raising the legal debt limit are “now all together,” poised to be resolved through a single negotiation.

‘Reckless Behavior’

The potential damage to the economy of a debt default was the focus of the meeting Obama had today with 15 financial executives, including Lloyd Blankfein, chairman and chief executive officer of Goldman Sachs Group Inc.; Michael Corbat, CEO of Citigroup Inc.; Jamie Dimon, chairman and CEO of JPMorgan Chase & Co.; and Brian Moynihan, CEO of Bank of America Corp.

“We need to get a conversation going about why this is such reckless behavior,” said Valerie Jarrett, a senior Obama adviser. “The financial community is in an excellent position to educate the public about the consequences to everyday folks in the event we default.”

Even with Obama’s vow that he won’t make concessions to raise the debt limit, Boehner, an Ohio Republican, has the advantage in talks when he can wield the threat of a default, said former Representative Tom Reynolds, who headed the House Republicans’ national campaign apparatus and remains in touch with many members through his current work as a lobbyist.

“The president and the secretary of Treasury are going to be very concerned about the debt ceiling regardless of what’s said,” he said. “It is unlikely this shutdown will be resolved this week. The question is whether it will be resolved next week. Either takes us close to Oct. 17.”

Lew’s Warning

After financial markets closed yesterday, Lew said in his letter to Boehner and other congressional leaders that the U.S. has begun using the final extraordinary measures to avoid breaching the nation’s debt limit.

He urged Congress to extend the nation’s borrowing authority “immediately.”

White House economic adviser Gene Sperling said yesterday that financial markets are overconfident that the stalemate will be resolved in time to avoid major economic damage.

“There is a false sense of complacency among some in the market that somehow things will be always solved at midnight,” Sperling, the director of Obama’s National Economic Council, told Bloomberg News reporters and editors.

‘Exit Strategy’

Patrick Griffin, a congressional lobbyist for President Bill Clinton during the budget battles and government shutdowns of the 1990s, said blending the debt limit and shutdown into a single negotiation provides an easier “exit strategy” for the two sides to end the confrontation.

The White House can make concessions to the Republicans without explicitly violating its pledge not to negotiate on raising the debt limit, Griffin said. The Democrats, he said, will have the edge when talks get under way and can give Boehner one or two items as political cover.

“There’s more wiggling room when there’s more on the table,” he said. “It allows you to be more subtle about who wins and who loses even if it’s only providing a fig leaf to the loser.”

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