Fiscal impasse widens as focus turns to US Senate leaders

Washington: Senate leaders of both parties began negotiations to avert a US default even as senators blocked legislation to prevent one and talks between the White House and House Republicans hit an impasse.

add_main_imageWith a partial government shutdown in its 13th day and a lapse in borrowing authority four days away, the best prospects for a deal shifted from the House to the Senate, where majority leader Harry Reid and minority leader Mitch McConnell held their first negotiating session since the shutdown began 1 October.

Democratic lawmakers warned on Saturday that the lack of movement this weekend may have an effect on financial markets when they open on Monday.NextMAds

“This is playing with fire,” Senator Charles Schumer, a New York Democrat, said on Saturday. “I worry on Monday when the American markets open whether the stock market will go down and interest rates will rise,” he said.

Lawmakers in both parties and both chambers said they weren’t sure what proposal could get enough votes to pass. After 17 October, the US will have $30 billion plus incoming revenue and would start missing payments sometime between 22 October 22 and 31 October, according to the Congressional Budget Office.

Senate Republicans on Saturday blocked Democrats’ plan to suspend the debt ceiling through 2014. Talks between House Republicans and President Barack Obama were at an impasse and rank-and-file House members headed home. Senate Democrats rejected a proposal from Republican Senator Susan Collins of Maine that had been gaining momentum.

The hurdles 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 health-care law must occur.

The leaders of JPMorgan Chase and Co. and Deutsche Bank AG said on Saturday that lawmakers shouldn’t risk a default on the nation’s debt because the effects would be devastating and the consequences aren’t knowable in advance.sixthMAds

“The US cannot default and, in my opinion, will not default,” JPMorgan chief executive officer Jamie Dimon said at a financial industry conference in Washington. “It would ripple through the global economy in a way you couldn’t possibly understand.”

In an English-language commentary on Sunday, Liu Chang, a writer with China’s official Xinhua News Agency, said the impasse has put many nations’ dollar assets in jeopardy. 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 US.

China is the biggest foreign holder of Treasuries at $1.28 trillion at the end of July.

The Standard & Poor’s 500 Index rallied 11 October after House Speaker John Boehner offered a debt-limit increase through 22 November without policy conditions. The index reached its highest level since September, increasing 0.6% to 1,703.20 at 4pm in New York.

Rates on Treasury bills maturing through the end of the year rose 11 October while rates on securities due in October fell from highs reached earlier in the week. Yields on benchmark Treasury 10-year notes rose four basis points on the week to 2.69%, according to Bloomberg Bond Trader prices.

US stock markets will be open on Monday, the federal Columbus Day holiday. Bond markets will be closed.

The partial government shutdown has led to furloughs of hundreds of thousands of federal employees and partial paychecks for others. It has closed federal operations such as national parks, though some services and benefits including Social Security checks continue.

“I hope our talking gives some solace to the American people and to the world,” Reid said on Saturday of what he called very preliminary conversations with McConnell. “We’re trying to figure out a way to go forward.”

Obama met privately with Senate Democratic leaders for an hour and 15 minutes on Saturday afternoon.

Boehner told fellow Republicans on Saturday that the president rejected his latest fiscal offer. The House hasn’t considered legislation to raise the debt limit and isn’t scheduled to vote again until tomorrow evening.

“At this point, they have dealt themselves out of this process,” Richard Durbin of Illinois, the second-ranking Democrat in the Senate, said of House members.

The Reid-McConnell talks, between two veteran deal makers, represent the best chance for an agreement, said Senator Bob Corker, a Tennessee Republican.

“It’s very evident that the White House is not going to be involved in negotiations, or at least at this point they’re not,” he said. “The centerpiece is Reid and McConnell, so I think all of us want to support those efforts.”

Democrats prefer raising the $16.7 trillion US debt limit for as long as possible and with no policy conditions attached. Republicans on Saturday blocked Reid’s plan to push the next debt-limit fight into 2015. The 53-45 vote fell short of the 60 needed to advance the measure.

Reid then rejected a proposal from Collins and Democrat Joe Manchin of West Virginia. That plan would push the next debt-limit fight to the end of January, extend government funding for six months to March and give 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.

The proposal would make two changes to the president’s healthcare 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.

Democrats, including Durbin, said the debt-limit increase is too short to provide certainty and the funding extension at Republican-preferred levels is too long.

For two days, the prospects for a potential deal had focused on talks between Boehner and Obama that would push the lapse of borrowing authority to 22 November 22 from 17 October. Republicans also wanted to attach policy conditions to a separate spending bill that would end the government shutdown.

Reid, a Nevada Democrat, said talks between the White House and House Republicans were done.

A White House official described the Collins proposal as constructive. Still, the administration shares the concerns of Senate Democrats, who object to the spending levels set by the plan and some of the changes it would make to the health-care law, said the official, who spoke on condition of anonymity to discuss the plan.

“Every offer we’ve made they just flat turned us down without any counter-offer,” said Representative John Fleming, a Louisiana Republican. “Our level of expectations for the president has gradually dropped over the years to a point where we don’t expect anything from President Obama.”

Any prospective deal faces questions, including whether Boehner will allow a vote on a proposal that most Republicans would oppose. He has repeatedly encountered opposition from hard-liners focused on the health-care law.

Also, because there are so few days left until 17 October, a single senator may be able to use procedural moves to prevent an agreement from becoming law before that date.

“I am looking for our Republican colleagues to stay strong with House Republicans to resolve this stand-off so that we can get back to the nation’s business,” said House majority leader Eric Cantor of Virginia. Bloomberg

Chris Strohm, Julianna Goldman, Caitlin Webber, James Rowley, Terry Atlas, Julie Bykowicz, Lisa Lerer and Jesse Hamilton in Washington, Daniel Kruger in New York and Nerys Avery in Beijing contributed to this story.