Obama: Debt Ceiling Negotiations Shifting To Deal Minus Cuts

Focus of debt talks to narrow without deal by Friday, White House says

President Barack Obama and congressional negotiators will have to shift the focus of their negotiations to increasing the federal debt ceiling if they fail to make significant progress by Friday toward a comprehensive deficit reduction deal that would cut spending and raise taxes, White House Press Secretary Jay Carney said Thursday.

Obama had told negotiators Wednesday that he had set Friday as a deadline to decide whether a broad agreement on debt reduction is feasible, Democratic officials said.

The president was scheduled to meet behind closed doors at the White House with top congressional leaders on Thursday afternoon -- the fifth straight day of talks.

Administration officials have warned that a failure to raise the current $14.3 trillion debt ceiling by August 2 could trigger a partial default. If Washington lacks the money to pay its bills, interest rates could skyrocket and the value of the dollar could decline, among other things.

The seriousness of the situation was reinforced Wednesday when Moody's Investors Services -- a major rating agency -- said it would put the sterling bond rating of the United States on review for possible downgrade. Moody's said it initiated the review because of "the rising possibility" that Congress will fail to raise the debt ceiling in time.

A default "would be a calamitous outcome," Federal Reserve Chairman Ben Bernanke told members of the Senate Banking Committee on Thursday. "It would create a very severe financial shock that would have effects not only on the U.S. economy but the global economy."

In addition, Bernanke said, "it would be a self-inflicted wound."

Obama warned earlier this week he could not guarantee that older Americans will receive their Social Security checks next month if a deal is not reached. GOP leaders accused the president of using scare tactics.

For their part, Republicans continued to oppose Obama's call for increased tax revenue to be part of a deficit reduction deal, and promised Thursday to renew the GOP's push for a balanced budget amendment to the Constitution, arguing that it's necessary to achieve fiscal stability. Votes in Congress on the measure are expected next week.

"We refuse to let this president use the threat of a debt limit deadline to get us to cave on tax hikes or phony spending cuts," said Senate Minority Leader Mitch McConnell, R-Kentucky. "It's time to make it clear to the American people where the two parties stand in this debate. Either you're with the president and his vision of a government that continues to live beyond its means, or you're with those of us who believe Washington needs some strong medicine."

Others said the whole debate is a sad reflection of an increasingly dysfunctional political process.

"I am very disappointed in the United States Senate," said Sen. Bob Corker, R-Tennessee. "I am very disappointed in the White House. I am very disappointed in all of us. I am very disappointed in the childish behavior that this body has continued to exude over the course of this entire year."

The Democratic message Thursday was that a few Republicans spurred by the conservative tea party movement were preventing the possibility of a major agreement that could help address mounting federal deficits over the next decade and clear the way for Congress to increase the debt ceiling.

Such a deal is a "holy grail," Carney told reporters, adding that it is "right here within reach. It's on the table. You just have to reach for it and grasp it and be willing to compromise to do it."

Wednesday's negotiations ended on a tense note. Obama said the extended political wrangling and apparent lack of progress confirmed what the public considers to be the worst of Washington, according to Democratic sources familiar with the talks who spoke on condition of not being identified.

"This could bring my presidency down," sources quoted Obama as saying in reference to his pledge to veto any short-term extension of the debt ceiling -- a move suggested by House Majority Leader Eric Cantor, R-Virginia. But "I will not yield on this," the president added.

Obama has insisted on one deal that will raise the amount of money the government can borrow to sufficient levels to last through 2012 -- after his campaign for re-election.

According to Cantor, Obama became "very agitated" on the state of the talks and said "something's gotta give."

Obama called for Republicans to compromise on either their insistence that a debt-ceiling hike must be matched dollar-for-dollar by spending cuts or on their opposition to any kind of tax increase, Cantor said.

"And he said to me, 'Eric, don't call my bluff.' He said 'I'm going to the American people with this,'" Cantor quoted Obama as saying.

"I was somewhat taken aback," Cantor said.

Democratic sources provided a different take on the exchange, saying Obama cut off Cantor at the end of the two-hour meeting after the GOP leader dumped his previously held position against a short-term extension.

Senate Majority Leader Harry Reid, D-Nevada, said Thursday that "Cantor has shown he shouldn't even be at the table, and Republicans agree he shouldn't be at the table."

Reid is "frustrated," Cantor replied. But "we're going to abide by our principles."

For his part, Speaker John Boehner, R-Ohio, downplayed reports of a split between himself and Cantor. Analysts have speculated that Cantor, viewed in some circles as more conservative than Boehner, may be using the crisis to undermine GOP support for the speaker.

"We're in the foxhole" together, Boehner told reporters. "I'm glad Eric's there."

With time dwindling down, Democrats and Republicans remain at sharp odds over how to proceed. Obama has indicated a preference for a "grand bargain" that would save up to $4 trillion over the next decade through a combination of spending cuts, raising taxes on the wealthiest Americans and reforming politically popular entitlement programs such as Medicare and Medicaid.

GOP leaders remain adamantly opposed to any tax hikes, arguing that increasing the burden on "job creators" now would derail what has already proven to be, at best, a shaky economic recovery.

Reid confirmed Thursday that he and McConnell are working on a possible debt ceiling measure that could come up in the event the broader negotiations fail to reach agreement. It is based in part on a plan McConnell unveiled this week that would set up three short-term increases in the debt ceiling while at the same time registering the disapproval of Congress for such a move.

McConnell's proposal would give Obama power to raise the debt ceiling by a total of $2.5 trillion, but also would require three congressional votes on the issue before the 2012 general election.

Some congressional Democrats have promised to consider the plan, despite Obama's opposition to any short-term extension. However, some conservatives have said the McConnell plan amounts to a capitulation to the Democrats.

McConnell asserted Wednesday his proposal became necessary because an acceptable deficit reduction deal was proving unattainable and the country has to avoid a default that would be "bad for Republicans."

"If we were to go into default ... the practical effect of that will be to allow the president to make us co-owners of a bad economy," McConnell said in a radio interview.

Boehner refused to dismiss McConnell's plan Thursday, calling it a fallback option that "may be worthy at some point." The day before, Cantor signaled opposition to the proposal, but he stood next to Boehner when the House speaker spoke about the plan Thursday.

Consideration of a fallback option has gained more attention over the last couple of days in part because of the GOP's refusal to budge on taxes.

At the heart of Obama's call for more tax revenue would be allowing tax cuts from the Bush presidency to expire at the end of 2012 for families making more than $250,000. His plan would keep the lower tax rates for Americans who earn less.

Obama noted earlier this week he is not looking to raise any taxes until 2013 or later. In exchange, Obama said, he wants to ensure that the current progressive nature of the tax code is maintained, with higher-income Americans assessed higher tax rates.

Republicans continue to insist such a move would be economically disastrous.

At the heart of the GOP resistance is a bedrock principle pushed by conservative crusader Grover Norquist against any kind of tax increase. A pledge pushed by Norquist's group, Americans for Tax Reform, has been signed by more than 230 House members and 40 senators, almost all of them Republicans.

Sources: CNN, NY Times