Boehner maneuvering Democrats into taking short-term deal

By Karoun Demirjian

Published Sunday, July 24, 2011 | 1:19 p.m.

Updated Sunday, July 24, 2011 | 6:59 p.m.

Washington is running out of time to strike a debt deal and Speaker John Boehner appears to be using the situation to his advantage to force Democrats to accept a short-term deal.

Talks between Boehner, Senate Majority Leader Harry Reid, Senate Republican Leader Mitch McConnell and House Democratic Leader Nancy Pelosi stalled Saturday night over how to structure a two-part approach to raising the debt ceiling. Republicans are adamant that any increase to the debt limit be accompanied by an equal amount of spending cuts -- though according to sources familiar with the negotiations, cuts are more likely to slightly outweigh the debt ceiling hike.

Democrats are huddling this evening with the President and Treasury Secretary Tim Geithner to discuss a plan, as Boehner conferences with his House caucus — not a good sign that an agreement is in the works by this evening, and a signal that "negotiations" are turning into a battle of who can push whom.

Senate Majority Leader Harry Reid is apparently ready to meet Speaker Boehner's threat to move on a short-term lift of the debt ceiling Sunday morning by releasing a plan of his own to cut the debt by about $2.5 trillion, with no tax hikes. His office made that announcement while Boehner was speaking to House Republicans via conference call.

But Boehner reportedly told House Republicans on a conference call this afternoon that he was working with the Senate on a deal that the President couldn't refuse.

Given that there are only nine days left until the U.S. defaults, the two-step plan is still emerging as the basis for the process.

The first part of the two-step plan envisions an introductory slash of $1 trillion, exclusively from discretionary spending. That could buy about $900 billion in wiggle room on the nation's debt limit — enough to take the country’s borrowing authority through the end of the year.

In the second phase of the plan, lawmakers would defer to a deficit committee to recommend additional savings, including cuts to defense, Social Security, Medicare and Medicaid. In that phase, lawmakers could seek about $1.7 trillion to $1.8 trillion in cuts, to bring the total package to $2.7 trillion -- enough to get through the end of 2012.

"In an effort to reach a bipartisan compromise, we are putting together a $2.7 trillion deficit reduction package that meets Republicans' two major criteria," Reid said. "It will include enough spending cuts to meet or exceed the amount of a debt ceiling raise through the end of 2012, and it will not include revenues.

The question remaining is what though, would force that second phase to come about. If the Congress or the debt commission can’t reach an agreement on the cuts, the president would need some other authority to automatically raise the debt limit -- or, in five or six months, Congress could be in the same position it is now.

Until things fell apart last week, Reid and McConnell were working on a backup plan to raised the debt limit in stages. The increases weren’t dependent on reaching congressional harmony; the president would simply be able to order them if Congress couldn't come together to override a veto of their disapproval resolutions of his debt-cutting plans.

By leaving the matter unresolved, it would open the door to a renewed political battle, and thus pave the way for Boehner and the Republican caucus to do just what they’ve been threatening all along: push forward on their Cut, Cap, and Balance bill.

Republicans have been pushing a proposal that leverages raising the debt limit against a plan to pass a constitutional amendment. The amendment would balance the budget and cap federal spending at just less than 20 percent of the gross domestic product -- a threshold Democrats argue is so low it would cause the national economy to hemorrhage 700,000 jobs.

But in conferences and conference calls with Republicans, Boehner has been moving at full speed on the balanced budgets-for-borrowing authority equation.

"As you all know, the Senate tabled the Cut, Cap & Balance Act...so the question becomes – if it’s not the Cut, Cap & Balance Act itself," Boehner told House Republicans Sunday evening, according to a transcript of the call. "The path forward, I believe, is that we pull together as a team behind a new measure that has a shot at getting to the president's desk. It won't be Cut, Cap, & Balance as we passed it, but it should be a package that reflects the principles."

He's also been scoffing at the notion that only guaranteeing a short-term hike in the debt limit would actually leave the economy open to a credit downgrade.

"I would prefer to have a bipartisan approach to solve this problem,” Boehner said on Fox News Sunday. “If that's not possible, I and my Republican colleagues in the House are prepared to move on their own ... today.”

Republicans point to 38 instances in the past three decades when interest rates were raised for periods of six months or less, and U.S. credit wasn’t downgraded.

But in that time, the economy has never been in quite as bad shape as it is now.

On CBS's "Face the Nation" Sunday morning, Senate Majority Whip Dick Durbin pointed out that all three credit rating agencies — Moody's, Standard & Poor's, and Fitch — had warned lawmakers that while a short-term lift of the debt limit might temporarily keep the country from defaulting, the economy was so weak that it likely won't be enough to keep U.S. credit intact.

“Speaker Boehner is ignoring that warning,” Durbin said. “If we fail to extend the debt ceiling we will be imposing a new tax on working families and businesses across America ... the American economy is too fragile at this point for us to allow that to happen.”

Democrats, however, are running out of time to negotiate a more long-term deal.

The Senate needs about a week to process a controversial bill, as there are senators who might try to block or filibuster the legislation. Likewise in the House, Boehner has to worry about a potential mutiny in the Republican ranks if he presents them with anything less than a total win -- several members are prepared to vote against a debt limit package if it has anything in it that even smells like an indirect tax hike.

That puts the deadline for coming up with a package and starting it through the legislative process at about mid-week.

But global financial forces won’t wait that long before they start to complicate the climate surrounding these deals.

The stock markets are going to be the final judge of what even the worse-case scenario will mean for the economy, as it’s on those trading floors that government spending connects most directly with consumer confidence in the private sector.

The currency markets in New Zealand, which don’t have a great amount of influence over U.S. and other global markets, open at 4 p.m. EST. The main stock markets in Australia and Japan then open at 8 p.m. Eastern -- at which point some sort of a pre-deal has to be made, lawmakers are saying, to avoid the first stages of financial havoc.

That gives Reid, Boehner, Pelosi and McConnell a few more hours to huddle together in the Capitol Sunday and try to strike a bargain that’s politically saleable to the stock traders -- as well as their parties. Reid and Pelosi met with the president for more than an hour Saturday night.

A White House official said that Pelosi, Reid and Obama reiterated their opposition to a short-term debt limit increase.