Senators Struggle to End U.S. Shutdown as Default Looms

Senate leaders struggled to draft an accord that averts a U.S. default and restores full government operations, as the shutdown entered its 13th day with a lapse in borrowing authority four days away.

Senate Majority Leader Harry Reid, who started talks yesterday with Minority Leader Mitch McConnell, said the two had “a productive conversation” this afternoon.

“The discussions were substantive, and we’ll continue those discussions,” Reid said before the Senate wrapped up almost four hours of debate without a deal being unveiled. “I’m optimistic about the prospects for a positive conclusion.” Senators plan to reconvene at 2 p.m. tomorrow, and the House at noon, with no votes until 6:30 p.m.

McConnell of Kentucky issued a statement earlier saying “it’s time for Democrat leaders” to support a plan, based on one drafted by Republican Susan Collins of Maine, which Reid, of Nevada, rejected yesterday.

The talks are shifting away from Republican efforts to curtail President Barack Obama’s health-care law and to rescind a tax on medical devices to focus on the level of spending and the duration of the deficit-ceiling extension.

While Democratic and Republican senators on Sunday news shows also expressed optimism, there was little tangible evidence as global financial markets begin reacting to yesterday’s breakdown of talks between Obama and House Speaker John Boehner of Ohio.

Dollar Falls

Democrats warned yesterday that a lack of movement this weekend may have an effect on financial markets. Amid concern the political standoff in the world’s biggest economy won’t be broken, the dollar dropped 0.5 percent to 98.10 yen as of 7:06 a.m. in Sydney, heading for its first decline in five days. It depreciated 0.2 percent to $1.3566 per euro, after sliding on Oct. 3 to an eight-month low of $1.3646. Europe’s 17-nation shared currency weakened 0.3 percent to 133.08 yen.

International Monetary Fund Managing Director Christine Lagarde said the congressional deadlock over the U.S. debt ceiling is threatening the U.S. and world economies, and she cautioned against “creative accounting” to avoid default.

‘Massive Disruption’

“If there is that degree of disruption, that lack of certainty, that lack of trust in the U.S. signature, it would mean massive disruption the world over,” Lagarde said in an interview on NBC’s “Meet the Press” program about the impact of not raising the borrowing limit. “And we would be at risk of tipping, yet again, into recession.”

U.S. stock markets will be open on the federal Columbus Day holiday tomorrow. Bond markets will be closed.

“I worry on Monday when the American markets open” whether “the stock market will go down” and “interest rates go up,” Senator Charles Schumer, a New York Democrat, said.

At the White House, Obama spent the day calling top lawmakers, including House Minority Leader Nancy Pelosi, and getting briefed by staff about the impact of the shutdown on federal operations, according to aides who spoke on condition they not be identified. Vice President Joe Biden, who played a pivotal role in previous fiscal standoffs, has kept a lower profile during these talks, spending the weekend at Camp David. An aide said he is fully engaged in the discussions.

Pelosi Call

Obama in his call with Pelosi “reinforced that there must be a clean debt limit increase” -- and a stopgap spending measure also free of policy add-ons -- before budget negotiations can begin, according to a White House statement.

Collins’s group of moderate senators trying to frame a deal has no meetings planned today and talks probably will resume tomorrow, said a Senate Democratic aide with knowledge of the negotiations, who spoke on condition of anonymity.

“It’s taken far too long, we never should be in this situation, but I do believe we are going to see a resolution this week,” Collins said today on CNN’s “State of the Union.” Voicing optimism that her plan, which Senate Democrats rejected yesterday, will provide a framework for an agreement, she said “a lot of constructive discussions” are going on behind the scenes.

Six senators working with Collins -- Democrats Joe Manchin of West Virginia, Heidi Heitkamp of North Dakota, Mark Pryor of Arkansas, Amy Klobuchar of Minnesota, Joe Donnelly of Indiana and independent Angus King of Maine -- today said they don’t support the proposal in its current form.

“Productive, bipartisan discussions” have taken place, “but there is no agreement,” the senators said in a statement.

Chief Hurdles

The hurdles to a deal remain the same ones that have bedeviled Congress for a month. Democrats insist that policy changes shouldn’t be attached to a debt-ceiling increase and stopgap spending bill. Republicans, internally fractured over strategy, say spending cuts and revisions to the 2010 Patient Protection and Affordable Care Act must occur.

The Senate negotiations also include discussions of easing the spending caps imposed by the across-the-board cuts known as sequestration. Senator Rand Paul of Kentucky, also on CNN, said he and many other Republicans consider spending increases a “nonstarter.”

Richard Durbin of Illinois, the second-ranking Democrat in the Senate, said there is a $70 billion spending gap between Democrats and Republicans.

‘Fig Leaf’

Disagreement over spending is the big sticking point in the talks, said Jim Manley, a former aide to Reid. Manley, in a telephone interview, said he’s watching “to see if Senator McConnell demands some sort of fig leaf from Senator Reid to protect the speaker or whether he’s prepared to throw him overboard to get this all behind him.”

Congress is running short of time to get passage of any agreement in the Senate and action by the House before Oct. 17, when U.S. borrowing authority lapses. The federal government would start missing payments sometime between Oct. 22 and Oct. 31, according to the Congressional Budget Office.

Representative Tim Huelskamp, a Kansas Republican, played down the importance of this week’s deadline and said the White House “is trying to scare the markets.”

“Oct. 17 is a date that won’t have a major impact unless the White House can create concern about that,” Huelskamp said on CBS’s “Face the Nation.”

Reserve Currency

That’s at odds with the view from China, the largest foreign holder of U.S. Treasuries. In an English-language commentary today, Liu Chang, a writer with China’s official Xinhua News Agency, said the impasse has put many nations’ dollar assets “in jeopardy.” China held $1.28 trillion in Treasuries at the end of July.

Liu called for a new international reserve currency to replace the dollar “so that the international community could permanently stay away from the spillover of the intensifying domestic political turmoil” in the U.S.

Japanese Finance Minister Taro Aso said in an interview Oct. 11 with Bloomberg TV that it was up to the U.S. to resolve its debt impasse, not for Japan to fret over its investment in Treasuries. Japan held $1.14 trillion worth of U.S. Treasuries at the end of July, the second-largest foreign holder, according to data from the Treasury Department.

The impasse in Washington “is wreaking havoc around the world,” Senator Bob Corker, a Republican from Tennessee, said on “Fox News Sunday.” “I hope over the next week we will reach a conclusion. I think we will.”

‘Crisis Mode’

“We are in a crisis mode here,” Manchin said on Fox. “To take this to the brink is catastrophic.”

Reid and McConnell yesterday held their first negotiating session since the shutdown began Oct. 1. Durbin called their talks “a breakthrough” that “has the promise of finding a solution.” He spoke on “Meet the Press.”

“I’m cautiously hopeful, optimistic that we can come to an agreement and open up the government and avoid default,” Schumer said today on “Face the Nation.”

“The frameworks they had were not far apart,” Schumer said, referring to McConnell and Reid’s effort. “The dispute has been how to undo” automatic budget cuts.

Senate Democrats yesterday rejected Collins’s plan after their leaders said its proposed debt-limit increase, to January, was too short to provide certainty, and the funding extension at Republican-favored levels, until March, was too long.

Automatic Cuts

Senator Dianne Feinstein, a California Democrat, said the Collins plan was unacceptable because it would have locked in spending at the level of $967 billion as part of the federal sequestration for discretionary domestic and defense programs.

The Budget Control Act of 2011 established the $967 billion spending cap for federal government spending in fiscal 2014, $21 billion less than the post-sequester fiscal 2013 level. If Congress doesn’t pass legislation to reduce spending or alter the cap before January, a second round of automatic discretionary spending cuts goes into effect.

The Republican assault on Obama’s health plan is fading as pressure increases to get a deal and polls show the public blaming Republicans for the partial government shutdown.

Republican Senator Lindsey Graham of South Carolina said “it is unrealistic for us to defund or delay Obamacare by shutting down the government.”

Owning Obamacare

“To the Republicans I say, ‘The sooner this is over, the better for us,’” Graham said on ABC’s “This Week” broadcast. “To the Democrats I say, ‘You own Obamacare.’ It is the political gift that will keep on giving. Obamacare’s faults with be front and center in 2014.”

Collins said elements of her plan may help shape a deal.

The proposal by Collins and Manchin would have given federal agencies more flexibility under the across-the-board cuts known as sequestration.

The plan also would have set a mid-January deadline for longer-term budget talks and make two changes to the president’s health-care plan. One would delay a tax on medical devices for two years and make up lost revenue through pension-rule changes. The other would require the Obama administration to verify income levels for enrollment in health benefits.

A Senate deal could face a hostile reception from House Republicans still seeking to curtail Obamacare and opposed to easing the spending caps.

“We are not going to increase spending,” Representative Jim Jordan, an Ohio Republican, said on Fox. “The sequester is one of the few good things we’ve done to control spending.”

Republican strategist Ron Bonjean today described the latest efforts to find a way out of the impasse as “a Rubik’s Cube from hell,” adding that even if the Senate passes a plan, it would be “still pretty much a jump ball in the House.”

“They may simply reject it without offering a Plan B,” Bonjean, a one-time aide to former Republican Speaker Dennis Hastert, said in a telephone interview.