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Fallback debt plans in works

Even limited approaches are drawing ire; markets dip as default date nears

By Matt Viser
Globe Staff / July 25, 2011

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WASHINGTON - House and Senate leaders yesterday began working separately to craft their own fallback plans to raise the debt limit, as nervous markets dipped in response to the stalemate in the Capitol.

The value of the dollar and US stock market futures declined modestly with nine days remaining until America faces a default on its debt. The price of gold shot up as investors began seeking safe havens for cash.

Republican House Speaker John Boehner missed a self-imposed deadline of late yesterday to produce a scaled-back plan to avert the looming crisis. But there was no major negative reaction as Asian markets opened last night.

If Aug. 2 arrives with no deal, the government’s credit ratings will be reduced. Officials are forecasting that a variety of government payments, including Social Security checks, will be jeopardized, and that damage to the economy - nationally and worldwide - will be swift and widespread.

Despite the high risk, Republicans and Democrats in Washington remained unable to bridge their differences on a debt limit package, which would include major cuts in projected government spending. After Boehner broke off talks with Obama on a more sweeping bargain for more than $3 trillion in cuts and tax increases on Friday, a weekend of behind-the-scenes meetings in a largely empty Capitol produced no evidence of a breakthrough.

Boehner announced yesterday that he will move forward with a short-term proposal that could be backed by House Republicans but won instant opposition from Democrats and a presidential veto threat. “I would prefer to have a bipartisan approach to solve this problem,’’ Boehner said yesterday morning on Fox News Sunday. “If that is not possible, I and my Republican colleagues in the House are prepared to move on our own.’’

President Obama hosted Democratic leaders for more than an hour at the White House last night, and afterward the Senate majority leader, Harry Reid, rejected Boehner’s short-term solution.

Reid was planning to release a plan of his own that is likely to be opposed by House Republicans and maybe even his own caucus. His plan would cut spending by $2.7 trillion over 10 years, and allow the debt limit to be raised by about the same amount. The plan is not expected to include any new tax revenue, which could cause friction from Senate Democrats who have wanted new revenues to accompany budget cuts.

“We hope Speaker Boehner will abandon his ‘my way or the highway’ approach, and join us in forging a bipartisan compromise along these lines,’’ Reid said last night in a statement.

Global investors have been keeping a close eye on the US debt limit talks for months. The dollar slipped in value yesterday compared with the yen, euro, and Swiss franc. Dow Jones and S&P 500 stock market futures also declined in value, by about 1 percent in early trading.

“I’ve never seen economic catastrophe courted so cavalierly and casually by a political party,’’ Senator John Kerry, a Massachusetts Democrat, said in a statement. “The House Republicans are calling all the shots in their party, and they’re tempting and maybe even rooting for disaster when the markets open Monday.’’

Representative Michael Capuano, a Somerville Democrat, said he expected that there will eventually be some response in the markets if no plan emerges - and said that would probably be a good thing. “I don’t know what else is going to move people off their philosophical commitments,’’ he said.

“We’re all aware of what time the markets open,’’ Representative Frank Guinta, a New Hampshire Republican, said in an interview. “And we’re aware that how the United States operates affects countries worldwide. We’re trying to be responsible.’’

Obama and Democrats say they have moved to the center and have sought a compromise, by agreeing to pass major spending cuts and changes to programs like Social Security and Medicare, along with broad changes to the tax code. But conservative House Republicans, including those in the Tea Party caucus, have dug in firmly against any tax increases, and have thus far said they will only agree to spending cuts.

Treasury Secretary Tim Geithner yesterday said a potential large-scale deal that had been under negotiation last week by Obama and Boehner was still alive, even after its very public collapse on Friday night.

“There’s still a chance that that may prove the best way to get the votes,’’ Geithner said this morning on “Fox News Sunday.’’

Minutes later on the same show, Boehner was coy about whether a renewed deal with the White House was still possible. “I don’t know. It may be pretty hard to put Humpty Dumpty back together again,’’ Boehner said. “But my last offer is still out there. I have never taken my last offer off of the table and they never agreed to my last offer.’’

It was an eerily quiet day on Capitol Hill, with the marble hallways empty, save for about two dozen reporters camped outside Boehner’s office. Both House and Senate lawmakers, who left for the weekend as their leaders stayed to hammer out an elusive deal, are scheduled to return today.

But now, in addition to ideological differences, the clock becomes an obstacle. Boehner has said legislation would need to be released today in order for the House to vote by Wednesday and give the Senate enough time to approve the same plan before Aug. 2.

“For us to get this done by August 2 - which is critical, and that’s the deadline all the leaders accept - they need to start this process in the House Monday night,’’ Geithner said yesterday on CNN’s “State of the Union.’’

Until Friday, Boehner and Obama had been negotiating a long-term plan that would have included nearly $3 trillion in cuts during 10 years, as well as a rewrite of the nation’s tax code that would have brought in at least $800 billion in new revenue.

Boehner said he left those talks when Obama asked for another $400 billion in revenues that would come through tax increases. He indicated yesterday that he would still accept $800 billion in new tax revenue. It is unclear whether the White House would drop its push for another $400 billion in revenue - or if Boehner would accept something less than that.

Separately, Boehner has been pursuing a plan that would involve a two-phase approach that would immediately cut about $1 trillion in spending and raise the debt limit by the same amount, enough to continue spending levels until the end of the year, according to congressional aides briefed on the negotiations. A second increase to the debt limit would then be required early next year, but would be tied to a broader range of entitlement reforms and tax code changes.

This approach was meeting resistance from Democrats who are opposed to any short-term measure; Obama has insisted that the debt limit be extended until 2013.

Obama’s chief of staff, Bill Daley, said yesterday on NBC’s “Meet the Press’’ that Obama would veto a plan that doesn’t extend the limit into 2013. “The president believes that we must get this uncertainty out of the system,’’ Daley said.

Just after Daley’s appearance, Senator Tom Coburn, a Republican of Oklahoma, challenged the idea that Obama should veto legislation that only allows a short-term debt limit extension. “I think that’s a ridiculous position,’’ he said. “Because that’s what he’s going to get presented with.’’

Congress returns today, but with few signs of a breakthrough. “They distrust each other so much that they can’t even cut a very simple, let’s-just-keep-the-government-running type of plan,’’ said Scott McLean, a political science professor at Quinnipiac University. “I don’t see a way out of this. Nobody’s willing to blink and give in.’’

Theo Emery of the Globe staff contributed to this report. Matt Viser can be reached at maviser@globe.com.