The U.S. House of Representatives and the Senate are on a veritable crash course this week to reach agreement on a plan for raising the national debt limit prior to the August 2 deadline. Although negotiations between the White House and Congressional leaders stalled over the weekend, the two sides appear ready to re-engage with a joint goal of avoiding a catastrophic credit default.
Treasury Secretary Timothy Geithner yesterday announced his belief that progress is being made on an agreement. He added that he is "absolutely" confident that the administration and Congressional leaders can reach an agreement before the deadline.
"Despite what you hear, and this is a complicated place, Washington, people are moving closer together," Geitner said. "You've seen the leadership of the Republican party, in the Senate and the House, definitively take default off the table as leverage for a deal - that's encouraging."
Geitner Encouraged by Statements
Also encouraging, he said, were statements from Speaker John Boehner (R-OH), House Majority Leader Eric I. Cantor (R-VA), Senate Minority Leader Mitch McConnell (R-KY) and Senate Minority Whip Jon Kyl (R-AZ) recognizing that "default is not an option." However, Geitner added, "It's not enough, because we still need to find some way to make progress and reach a deal."
Some conservative Republicans still refuse to accept that the August 2 deadline is a hard and fast target. They say the country could continue to operate fiscally without raising the debt ceiling simply by paying service on the nation's debt.
Geithner cautioned against that line of thinking, saying " If the United States of America were to default, it would be catastrophic for the American economy, for the American financial system, for the average American people. It would be a substantial, unfair tax on all Americans, and it would bring the world economy, again, because of the critical role we play in the global economy to the edge of recession."
The House has scheduled floor votes this week on a measure dubbed "Cut, Cap and Balance." The bill is a dramatic departure from recent discussions by the group of legislators led by Vice President Joe Biden and more-recent talks between the White House and Congressional leaders. It would reduce all federal spending to 18 percent of gross domestic product (GDP) and include a $2.4 trillion increase in the Treasury Department's borrowing authority and an amendment to the Constitution requiring a balanced budget.
Republican insiders contend that floor votes are critical in establishing a conservative voting record before any deals can be made. The strategy represents a major political escalation with Republicans focusing on growing their conservative base in anticipation of the 2012 House elections.
Democrats, meanwhile, continue to advocate for the debt-limit deal to include enhanced revenues to garner support. Some are adamant that the "grand bargain" advocated by President Obama, which included $3 trillion in deficit reduction while including $1 trillion is revenue enhancements, is the optimal solution. Many Blue Dog Democrats, however, are callilng for a smaller plan.
Adding pressure to the debate, bond-rating giant Moody's has threatened to downgrade the United States' AAA bond rating if the country is unable to meet its debt obligations next month.
"The current wide divisions between the House of Representatives and the Obama administration over the debt limit creates a high level of uncertainty and causes us to raise our assessment of event risk," Moody's analyst Steven Hess wrote in the report released on Monday.
This week will be the most critical in the ongoing debate, especially since Congress must draft, debate and pass compromise legislation in the two weeks left before the August 2 deadline.