The Wall Street Journal
By: Damian Paletta & Carol E. Lee
April 12, 2011
White House officials have opened the door to a deal with Republicans that would allow the U.S. to increase its ability to borrow, potentially easing worries in financial markets that the country might default on its debt.
Softening the administration's earlier insistence that Congress raise the so-called debt ceiling without conditions, officials now say they won't rule out linking an increase of the borrowing cap with cuts aimed at reducing the deficit--even though they'd prefer to keep the issues separate.
The shift by the White House comes at a critical point in a debate about the country's fiscal future. Last week, Congress and the president inked a deal to avert a government shutdown, shifting the focus of debate to the next milestone: The point in the next few weeks when the U.S. hits its borrowing limit. Republicans in Congress insist that any vote to raise the debt ceiling be accompanied by new spending limits or other deficit-reduction efforts.
"It's fantasy to think a bill to raise the debt limit could pass the House without significant spending cuts or reforms," said Brendan Buck, a spokesman for House Speaker John Boehner (R., Ohio.) "We hope they realize that."
Coupling the debt ceiling with deficit reduction suggests a scenario in which some of the many deficit-reduction measures flooding Washington could become reality. It also sets up a high-stakes drama over the debt ceiling, with financial markets already looking anxiously towards Capitol Hill for a speedy and clean resolution.
U.S. debt reached $14.213 trillion on Friday, just $81 billion under a limit set by Congress. The country can't issue more debt, which funds the government's operations including interest payments, once it hits the ceiling. The White House has called for an increase since January, but Congress has yet to move.
Analysts and government officials warn of dramatic consequences should the U.S. default on its debt, including soaring interest rates for businesses and households. Wall Street analysts say a default could have a severe impact on the way money flows around the world, potentially upending existing contracts because many borrowers pledge Treasury securities as collateral for loans.
Terry Belton, global head of fixed income at J.P. Morgan Chase & Co., said the yields, or interest rates, on Treasury bonds could begin moving significantly higher in June if Congress hasn't raised the debt ceiling by then.
"As we get closer to the brink and it becomes a real possibility, you will see the impact in yields," Mr. Belton said. "The questions from clients around it have really accelerated in the last week."
Until this weekend, the White House had taken pains to talk about the debt-ceiling vote as a standalone piece of legislation. In January, Austan Goolsbee, Chairman of the White House Council of Economic Advisers said Republicans shouldn't be "playing chicken with the debt ceiling and playing games potentially with the full faith and credit of the United States."
WSJ's David Wessel profiles President Obama's deficit-reduction plan that would cut into entitlements and raise taxes on those making at least $250,000 per year.
But David Plouffe, a senior White House adviser, suggested Sunday in an appearance on NBC's "Meet the Press" that "in that process" of raising the debt ceiling "we should be able to reduce the deficit."
On Wednesday, President Barack Obama plans to propose tax increases and cuts to entitlement programs such as Medicare to reduce the deficit. Administration officials hope his proposal might lead to a deal with Republicans.
Another possible avenue--one high-profile proposal among a series--comes from a bipartisan group of six U.S. senators who are close to a plan that would reduce the deficit by $4 trillion over 10 years, Sen. Mark Warner (D., Va.), one of the key members of the group, said Monday. That package could be advanced within 30 days.
Mr. Warner said the White House is "very aware of our efforts" and "would like to see us succeed."
Sen. Saxby Chambliss, (R., Georgia), Mr. Warner's partner in the talks, said he wanted "a major, major fiscal measure" attached to any bill to raise the debt ceiling. Other deficit-reduction proposals have come from House Budget Chairman Paul Ryan (R., Wis.) and a commission Mr. Obama appointed to make recommendations on reducing the deficit.
Vote: What should the main strategy be for deficit-reduction?
.Republicans liken the debt ceiling to a credit-card limit and say the U.S. needs to start living within its means. Democrats also use the credit-card analogy, but say the U.S. needs to pay the interest on money it has already spent.
A sense of urgency about the debt ceiling has grown at the White House and officials are moving aggressively to seek a deal with Congress. The Treasury says the U.S. will hit the debt limit no later than May 16 and could default by July 8.
In public, however, they've criticized Republicans who say they'll vote to raise the debt ceiling only in exchange for deficit-reduction measures. White House officials said Monday their preference is to have a vote to raise the debt ceiling with no other strings attached.
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."To hold hostage a vote...in return for an exchange for some proposal that one party wants is not the way to treat this issue," said White House spokesman Jay Carney. "It's too dangerous to do it that way."
Top Republicans have said they won't vote for a standalone debt-ceiling increase, citing the need for the U.S. to address its long-term fiscal problems, fueled by rising health-care costs and an aging baby-boom population.
Administration officials could try to offer a pledge to reduce the deficit. If that doesn't work, they might accept some Republican proposals but draw the line on others.
--Timothy W. Martin contributed to this article.
Write to Damian Paletta at email@example.com