Senate leaders’ talks on shutdown, debt limit stall as sides await market’s reaction

What started as a mad dash to strike a deal to lift the federal debt limit slowed to a crawl over the weekend as stalemated Senate leaders waited nervously to see whether financial markets would plunge Monday morning and drive the other side toward compromise.

Republicans seemed to think they had more to lose. After talks broke down between President Obama and House leaders, GOP senators quickly cobbled together a plan to end the government shutdown — now entering its third week — and raise the $16.7 trillion debt limit. Senate Minority Leader Mitch McConnell (R-Ky.) then asked Majority Leader Harry M. Reid (D-Nev.) to elevate negotiations to the highest level.

On Sunday — with the Treasury Department due to exhaust its borrowing power in just four days — Reid was wielding that leverage to maximum advantage. Rather than making concessions that would undermine Obama’s signature health-care initiative, as Republicans first demanded, Democrats are now on the offensive and seeking to undo what has become a cherished prize for the GOP: deep agency spending cuts known as the sequester.

Reid and McConnell spoke only once Sunday, a telephone call in the afternoon, aides said. As he closed a rare Sunday session of the Senate, Reid characterized the conversation as “productive” and “substantive.”

“I’m optimistic about the prospects for a positive conclusion to the issues before this country today,” he said.

But the shift in focus away from the imminent threat of a first-ever default on the U.S. debt sparked outrage among Republicans and alarm among the world’s financial leaders, meeting this weekend in Washington.

Christine Lagarde, managing director of the International Monetary Fund, warned on NBC’s “Meet the Press” that a failure by the United States to make scheduled payments to investors “would mean massive disruption the world over. And we would be at risk of tipping yet again into a recession.”

Republicans, meanwhile, said any agreement to back away from the sequester cuts would be opposed by GOP senators and doomed in the Republican House.

The fight over the debt limit is “typically a point where you try to create reforms and reduce deficits, so to agree to something that raises spending from previously agreed-to levels, I just can’t imagine that,” said Sen. Bob Corker (R-Tenn.). “I just can’t imagine how that has any possibility of becoming law.”

Democrats insisted that they have no interest in rolling back the sequester cuts now. Reid noted that the Senate had already approved and sent to the House a measure that would leave the cuts in place through the middle of November, with “not a word about breaking [spending] caps,” Reid said on the Senate floor.

Instead, Democrats said they objected to a debt-limit plan developed by Sen. Susan Collins (R-Maine) because it would permit the cuts to stay in place through March, allowing another round of sequester cuts to hit on Jan. 15.

At that point, agency spending for fiscal 2014, which began Oct. 1, would be on track to fall roughly $90 billion lower than Democrats have proposed. And with the fiscal year half over, Democrats would have scant opportunity to renegotiate the numbers, a top priority.

On Sunday, Democrats familiar with the talks said Reid was pressing McConnell to accept a quicker deadline on a temporary measure to fund federal agencies and reopen the government and a longer deadline for raising the debt limit. Collins’s proposal would extend the Treasury Department’s borrowing authority only until the end of January.

“The plan would be, open up the government immediately for a period of time before the sequester hits [on Jan. 15] and then have serious discussions where we might be able to undo the sequester,” Sen. Charles E. Schumer (D-N.Y.), the No. 3 Democrat in the Senate, said on CBS’s “Face the Nation.” “I’m optimistic that could work.”

Schumer noted that House Republicans have already offered to roll back the sequester cuts in a proposal the White House rejected Friday. That plan would have immediately suspended enforcement of the debt limit and reopened the government in exchange for a plan to replace sequester savings in 2014 (and perhaps longer) with reductions to Social Security and Medicare proposed in Obama’s budget.

“That was one place where the House Republicans and the president were not, you know, at total loggerheads,” Schumer said, suggesting that a deal could be cut if Republicans would consider new revenue along with cuts to entitlement programs.

McConnell appeared to be far less optimistic. The sequester cuts are part of $2.1 trillion in agency spending cuts over 10 years included in the Budget Control Act, the measure that raised the debt limit in 2011. Initially, Republicans, too, wanted to replace the sequester, particularly the portion that falls on the Pentagon. But since Obama won tax hikes on the wealthy as part of a year-end fight over the “fiscal cliff,” McConnell has taken to casting the sequester as a significant GOP victory from which the party cannot retreat.

“I think our main goal going into the year-end discussion is to not walk away from the bipartisan agreement that we made two years ago to reduce spending,” he told reporters this summer.

On Sunday, McConnell maintained a stony silence, failing to show up at the Capitol for his usual opening speech on the Senate floor. Instead, he issued a statement throwing his support for the first time behind the Collins proposal, calling it a “bipartisan plan” brokered with five other GOP senators and six senators who caucus with Democrats.

“It would reopen the government, prevent a default . . . and maintain the commitment that Congress made to reduce Washington spending through the Budget Control Act — the law of the land,” McConnell said. “It’s time for Democrat leaders to take ‘yes’ for an answer.”

Some Democrats tend to agree with McConnell. During a caucus meeting Saturday, Reid and his leadership team spent more than an hour arguing to Democrats anxious about default that the Collins plan is not a good deal for the party. On Sunday, Sen. Joe Manchin III (W.Va.), one of the Democrats working with Collins, defended the proposal on “Fox News Sunday” as having “a little bit of move for everybody. In a divided government, you can’t have it all your way.”

Soon after McConnell’s statement appeared, however, the Collins collaborators hustled into Reid’s office just outside the Senate chamber. Some of them were still inside when a joint statement was issued on behalf of Sens. Heidi Heitkamp (D-N.D.), Mark Pryor (D-Ark.), Amy Klobuchar (D-Minn.), Angus King (I-Maine) and Joe Donnelly (D-Ind.) “responding to Senator McConnell’s comments.”

“We have been involved in productive, bipartisan discussions with Senator Collins and other Republican senators,” the statement said, “but we do not support the proposal in its current form.”

An hour later, an update appeared adding Manchin’s name. “NOTE,” it said: “Senator Manchin was unavailable when the original statement was sent out.”

Treasury Secretary Jack Lew has said that if Congress fails to lift the debt limit, he will exhaust his borrowing authority on Thursday. At that point, he will have to rely on a cash balance of about $30 billion and incoming revenue to pay the nation’s bills.

Independent analysts say Lew will not begin missing payments immediately but will begin to run short of funds no later than Nov. 1, when nearly $60 billion is due to Social Security recipients, Medicare providers, active-duty military service members and civil-service retirees.

Investors are next due to collect interest on Treasury bonds — perhaps the most important payments from the perspective of global markets — on Oct. 31.

Still, many lawmakers are leery of missing the Thursday deadline — particularly Republicans, who are already getting hammered in public opinion polls over the government shutdown. The Dow Jones industrial average soared Friday on news that Obama and congressional Republicans were finally talking.

“Look, I guess we can get lower in the polls. We’re down to blood relatives and paid staffers now,” Sen. John McCain (R-Ariz.) joked on “Face the Nation.” “But we’ve got to turn this around. And the Democrats had better help us.”

Jeff Simon contributed to this report.

Lori Montgomery covers U.S. economic policy and the federal budget, focusing on efforts to tame the national debt.
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