(Updates market reaction from fifth paragraph. For more on the debt debate, see EXT6.)
Aug. 1 (Bloomberg) -- Congressional leaders, leaving no extra time before a default threatened for tomorrow, are racing to push through a compromise sealed with President Barack Obama last night to raise the U.S. debt limit by at least $2.1 trillion and slash government spending by $2.4 trillion or more.
The House plans votes today and the Senate may follow suit to consider the agreement reached during a weekend of negotiations that capped a months-long struggle between Obama and Republicans over raising the $14.3 trillion debt ceiling.
Both parties were working to sell the deal to their rank and file -- meeting resistance from social liberals who fault it for failing to increase taxes and from fiscal conservatives who say it’s insufficient to rein in the debt.
“The leaders of both parties in both chambers have reached an agreement that will reduce the deficit and avoid default,” Obama said in an appearance in the White House briefing room last night as congressional aides were drafting the legislative language. “This compromise does make a serious down payment on the deficit-reduction we need. Most importantly, it will allow us to avoid default.”
Stocks may rally after the deal, as futures on the Standard & Poor’s 500 Index expiring in September gained 1.1 percent to 1302.10 as of 11:01 a.m. in Frankfurt. Treasuries retreated after soaring July 29 in the wake of weaker-than-forecast U.S. economic growth figures. Ten-year notes yielded 2.85 percent, still less than their average 3.06 percent in the past year.
Market Reaction
The dollar rose 0.8 percent to 77.41 yen, gold fell 0.7 percent to $1,617.15 an ounce, and crude oil for September delivery rose 1.5 percent to $97.11 a barrel on the New York Mercantile Exchange.
The Treasury Department has said it will breach the borrowing limit and run out of options for avoiding default tomorrow without action by Congress to raise the debt ceiling. Congressional leaders expressed optimism they would avoid that risk -- however narrowly.
Senate Majority Leader Harry Reid, a Nevada Democrat, said he was relieved to announce “a historic bipartisan compromise that ends this dangerous standoff,” adding that Republicans and Democrats would have to unite to push it through.
House Speaker John Boehner of Ohio told fellow Republicans in a conference call around the same time that the deal wasn’t the world’s greatest, yet showed that their party had changed the debate in Washington, according to an official familiar with the conversation.
Two Installments
Lawmakers who were to vote within hours on the measure were just learning its details. It would raise the debt ceiling in two installments, sufficient to serve the nation’s needs into 2013. The framework, as detailed by officials in both parties, would cut $917 billion in spending over a decade, raise the debt limit initially by $900 billion and assign a special congressional committee to find another $1.5 trillion in deficit savings by late November, to be enacted by Christmas.
If Congress met that deadline and deficit target, or voted to send a balanced-budget constitutional amendment to the states, Obama would receive another $1.5 trillion borrowing boost.
In the case of Congress failing to take either step, or not producing debt savings of at least $1.2 trillion, the plan allows the president to obtain a $1.2 trillion debt-ceiling extension. Still, that would trigger automatic spending cuts across the government -- including in defense and Medicare -- to take effect starting in 2013. The Medicare cuts would only affect provider reimbursements, not benefits.
Borrowing Authority
An initial $400 billion increase in borrowing authority couldn’t be blocked under the deal. While Congress would get a chance to avert both debt-limit increases through disapproval resolutions, there’s little chance opponents could muster the two-thirds majorities needed in both chambers to override Obama’s veto.
Senate Minority Leader Mitch McConnell, a Kentucky Republican, said the agreement wouldn’t be final until members of his party had the chance to evaluate it. “But at this point, I think I can say with a high degree of confidence that there is now a framework to review that will ensure significant cuts in Washington spending,” and that there would be no default, he said.
Concessions Made
In the final stage of negotiations, 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 both chambers of Congress. Those terms were included in a bill the House passed narrowly and along party lines July 29, only to see the measure defeated in the Senate less than 24 hours later.
The White House agreed to forgo an automatic tax increase, a sticking point for Republicans, as one of the consequences to kick in if no debt-reduction law was enacted by Christmas.
Even so, Obama has an opportunity to increase revenue in the future if he opts to allow the 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 -- producing an estimated $3.5 trillion.
White House officials said the enforcement mechanisms will help them press Obama’s agenda as further deficit reductions are made, including additional tax revenue.
Preserving Leverage
The automatic spending cuts would include deep reductions in the defense budget, which Republicans oppose. That measure preserves leverage for Democrats in committee negotiations, the officials told reporters on condition of anonymity.
Because any spending cuts would be delayed until 2013, timed to coincide with the expiration of the Bush tax cuts, Republicans would have an added incentive to agree to overhaul taxes, which Democrats want to use for raising revenue.
Republicans argue that while the super-committee could propose tax increases, it wouldn’t likely do so, because the rules of the deal require that it assume -- as the Congressional Budget Office does -- the Bush tax cuts expire as scheduled at the end of 2012. That would mean that to count any new revenue toward deficit reduction, the committee would need to both erase the Bush tax reductions and then generate additional revenue on top of that.
In addition to guaranteeing a vote on the balanced-budget constitutional amendment between October and the end of the year, the agreement could give Republicans a chance to renew their push for the measure at the height of 2012 campaigns.
Constitution Amendment
If Congress failed to enact the deficit-reduction package, it would either have to transmit the amendment to the states or automatic spending cuts would be trigged. Republicans could argue that the amendment -- which takes a two-thirds vote in both houses to be sent for ratification to the states -- was the only alternative to painful spending reductions.
Some Democrats said they wanted no part of a deal that would omit any tax increase 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.”
Pelosi Noncommittal
House Minority Leader Nancy Pelosi of California offered no backing for the measure in a statement last night, nor promised any Democratic votes. With a morning gathering of Democrats planned behind closed doors, she said, “I look forward to reviewing the legislation with my caucus to see what level of support we can provide.”
Some Republicans also voiced disappointment with the measure. Senator Ron Johnson of Wisconsin said he was “highly concerned” about the size of the deficit narrowing being discussed, calling it too small to make a real difference in reining in the debt.
“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.
While the compromise will probably assuage immediate concerns about a 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 S&P “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.” The ratings company warned that the U.S. may lose its top AAA sovereign grade depending on the contents of the debt deal.
--With assistance from Lisa Lerer, Katarzyna Klimasinska, Brian Faler, Kathleen Hunter, Peter Cook, Julianna Goldman, Roger Runningen, Don Frederick and Mark Silva in Washington. Editors: Robin Meszoly, Chris Anstey
To contact the reporters on this story: Julie Hirschfeld Davis in Washington at [email protected]; Mike Dorning in Washington at [email protected]
To contact the editor responsible for this story: Mark Silva at [email protected]
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