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Version 6 Version 7
Senators Closer to a Deal on Debt Ceiling and Shutdown Senators Near Fiscal Deal, but the House Is Uncertain
(about 3 hours later)
WASHINGTON — A bitterly divided Congress edged closer to a budget and debt deal on Monday, while the rest of the world braced for the possibility of a legislative failure and an economic catastrophe that could ripple through financial markets, foreign capitals, corporate boardrooms, state budget offices and the bank accounts of everyday investors. WASHINGTON — Senate leaders neared the completion Monday night of a bipartisan deal to raise the debt ceiling and end the government shutdown while the rest of the world braced for the possibility of an American default that could set off a global financial disaster.
Democratic and Republican leaders in the Senate were close late Monday to an agreement that would increase the nation’s borrowing authority and provide enough money to operate the government until the end of the year. President Obama praised the Senate’s progress, but issued a blunt warning to lawmakers about the possibility that the deal could yet founder in the House. Negotiators talked into the evening as senators from both parties coalesced around a plan that would lift the debt limit through Feb. 7, pass a resolution to finance the government through Jan. 15 and conclude formal discussions on a long-term tax and spending plan no later than Dec. 13, according to one Senate aide briefed on the plan.
“This week, if we don’t start making some real progress, both the House and the Senate, and if Republicans aren’t willing to set aside their partisan concerns in order to do what’s right for the country, we stand a good chance of defaulting, and defaulting could have a potentially devastating effect on the economy,” Mr. Obama said at Martha’s Table, a Washington food bank. But while both Senator Mitch McConnell of Kentucky, the Republican leader, and Senator Harry Reid of Nevada, the Democratic leader, praised the progress that was made in the Senate, it was already clear that the most conservative members of the House were not going to go along quietly with a plan that does not accomplish their goal from the outset of this two-week-old crisis: dismantling the president’s health care law.
Senator Harry Reid of Nevada, the majority leader, and Senator Mitch McConnell of Kentucky, the Republican leader, on Monday neared completion of a framework for a deal. “We’ve got a name for it in the House: it’s called the Senate surrender caucus,” said Representative Tim Huelskamp, Republican of Kansas. “Anybody who would vote for that in the House as Republican would virtually guarantee a primary challenger.”
Senate negotiators were still talking late into the afternoon, but both parties were coalescing around a plan that would lift the debt limit through Feb. 7, pass a resolution to finance the government through Jan. 15 and call for the two parties to conclude formal discussions on a long-term tax and spending plan no later than Dec. 13, according to one Senate aide briefed on the outlines of the plan. There have been other showdowns between Republican lawmakers and President Obama that went to the last minute; in 2011, lawmakers reached a deal to raise the nation’s debt ceiling two days before officials said a default was possible, resulting in a stock market plunge and the downgrading of the nation’s credit rating. But the real possibility that as of Thursday the government would not be able to meet its obligations prompted grim warnings of an economic catastrophe that could ripple through stock markets, foreign capitals, corporate boardrooms, state budget offices and the bank accounts of everyday investors.
Any provision to delay or repeal a tax on medical devices – a sticking point in the negotiations – will almost certainly be excluded from the final deal, Senate aides said. Republicans sought to have the tax eliminated or pushed back, but Democrats strongly resisted. “If Republicans aren’t willing to set aside their partisan concerns in order to do what’s right for the country, we stand a good chance of defaulting, and defaulting could have a potentially devastating effect on the economy,” Mr. Obama told reporters at Martha’s Table, a Washington-area food bank.
The deal would include a one-year delay of another tax associated with the Affordable Care Act known as the reinsurance tax, which employers pay. Officials in several states said a default would mean unprecedented but unknown consequences to federal programs that are administered by the states, like Medicaid and food stamps. They also said that a market collapse could undermine state pension plans. And higher interest rates from a default on federal bonds could make short-term borrowing more difficult and costly for states.
Another Republican-backed measure would require tighter income verification standards for people who receive subsidies under the new health care law. Under the new guidelines, the Health and Human Services secretary would have to certify that the department can verify income eligibility. “This has us pretty nervous; it’s just a mess,” said John E. Nixon, the budget director for the State of Michigan. “We are taking it very seriously, and we have our agencies preparing contingency plans. But obviously nobody really knows how it’s going to unfold, so you can only plan so much.”
The timing of a vote – which seems likely to come right up against Thursday, the date the Treasury has said the country will exhaust its borrowing authority – is unclear. If, for instance, Democrats and Republicans shake hands on a deal on Monday and Mr. Reid is able to get consent from all of the Republicans, a vote could occur within hours; if any senator objects, however, the earliest a vote could occur is Friday. Scott D. Pattison, the executive director of the National Association of State Budget Officers, spent Monday morning fielding calls from anxious members across the country.
Democrats would like to bring any deal to the floor for a vote on Wednesday. Passing the plan on Wednesday, aides say, would not only avert the possibility of a devastating fiscal default, but would also put pressure on the Republican-controlled House to pass whatever bill the Senate sends over, or risk being blamed for a debt default. “A lot of these folks are looking into ‘What kinds of options do we have if there is a cash crunch?’,” Mr. Pattison said. “They are very, very nervous. It’s uncharted territory.”
Shortly after 2 p.m. on Monday, Mr. Reid and Mr. McConnell spoke on the Senate floor and made their most upbeat remarks yet about the progress of their talks. Investors on Monday reacted in tandem with the real-time reports of halting progress, with stocks falling in the morning before drifting into positive territory by the end of the day in response to reports of a possible deal in the Senate. At the same time, asset managers and banks began taking steps to be ready if the Treasury Department is unable to pay back its short-term debt on time. And world leaders expressed concern about the impact on their countries.
“I’m very optimistic that we will reach an agreement that’s reasonable in nature this week,” Mr. Reid said, using unusually warm terms to describe Mr. McConnell. “I deeply appreciate my friend the minority leader for his diligent efforts to come to an agreement.” In Britain, Jon Cunliffe, who will become deputy governor of the Bank of England next month, told members of Parliament that banks should be developing contingency plans to deal with an American default if one happens.
Mr. McConnell spoke next, calling their exchanges over the last few days “very constructive.” He added, “Those discussions continue, and I share his optimism that we’re going to get a result that will be acceptable to both sides.” And Chinese leaders called on a “befuddled world to start considering building a de-Americanized world.” In a commentary on Sunday, the state-run Chinese news agency Xinhua blamed “cyclical stagnation in Washington” for leaving the dollar-based assets of many nations in jeopardy. It said the “international community is highly agonized.”
House Republicans worked on a separate track to quickly pass a six-week extension of the government’s statutory borrowing authority. But Republican leaders were pushing significant changes to the health care law, possibly language denying federal subsidies to lawmakers, White House officials and staff members who must buy their health insurance on the Affordable Care Act’s new exchanges. The Senate could vote on an agreement as soon as Wednesday if Mr. Reid and Mr. McConnell discuss the deal with their members on Tuesday. That would leave little time for the House to debate and vote on what will be a contentious measure.
Senate Democrats and the White House have made it clear that such policy changes will never clear the Senate. If a deal is not completed by the end of Thursday, Treasury officials have said, the United States government will have exhausted “extraordinary measures” for managing its debt, meaning that its ability to pay its bills will be limited to the uneven flow of cash that comes into the Treasury on a daily basis. On some days, officials warned, the amount coming in will be less than the amount that is supposed to go out.
As they drafted their deal, Senate negotiators in both parties were hoping that House Republican leaders would have no choice but to let a bipartisan agreement struck on the verge of default come to a vote, even if it could only pass with votes from Democrats and a minority of the Republican majority. But even that deadline provides no real sense of clarity. It remains unknown how long the federal government could operate beyond that day, what programs it might choose to suspend, or how quickly the global financial markets would pronounce judgment.
Republicans accused Democrats of accepting nothing short of capitulation without offering anything in return. “The Democrats keep moving the goal posts,” Senator Susan Collins of Maine, one of the lead Republican negotiators, said Sunday. “Decisions within the Democratic conference are constantly changing.” Wall Street sentiment may be in evidence even before a vote, when the Treasury Department sells new 13- and 26-week bonds. If investors are hesitant to buy them, it could set a negative tone for the day, as was the case after an auction last Tuesday. George Goncalves, a Treasury strategist at Nomura Securities, said investors might not immediately panic if all signs were pointing toward a positive vote.
Senator John McCain, Republican of Arizona, warned on the CBS News program “Face the Nation” that the Democrats “better understand something.” “If it’s clear it’s going to happen by midnight, people will give them the benefit of the doubt because everyone knows it’s not a hard deadline,” Mr. Goncalves said.
“What goes around comes around,” he said, “and if they try to humiliate Republicans, things change in American politics.” Staff members at the Treasury, Federal Reserve and Federal Reserve Bank of New York are working together behind the scenes to prepare, officials said. Because of the government shutdown, now two weeks old, about four in five staff members are furloughed at the Treasury Department, including officials from the Office of Fiscal Projections, which is critical in determining the balances in the government’s accounts. But a Treasury official said that a team of core staff members was closely monitoring the department’s debt management and fiscal projections.
A rally on the National Mall on Sunday, led by Senator Ted Cruz, Republican of Texas, and former Gov. Sarah Palin of Alaska, was intended to show that Tea Party activists — supporters of the House Republicans who forced the shutdown over their opposition to the new health care law — were in no mood to give in. Some waved Confederate flags and called for Mr. Obama to be impeached. Officials at the White House and the Treasury have said that contingency plans are in place, though they have repeatedly declined to provide details about which obligations would be met and which would be abandoned. Market participants said such plans would most likely include a plan to shore up short-term funding markets that rely on government debt.
The dispute may involve debt ceiling technicalities, but at the core of the fight is a more fundamental question: with polls showing that Republicans are carrying the brunt of the blame for the shutdown, can Democrats demand total surrender, or should they offer concessions to complete the deal? As they drafted their deal, Senate negotiators in both parties were hoping that House Republican leaders would have no choice but to let a bipartisan agreement come to a vote, even if it could pass only with votes from Democrats and a minority of the Republican majority. But John A. Boehner, the House speaker, provided few assurances on Monday that an arrangement hammered out by his Senate colleagues could pass muster among his conservatives.
“You can’t just demand pure capitulation,” said Representative Tom Cole, Republican of Oklahoma. “Negotiations don’t work that way.” Senate Republicans had pushed for an agreement that included a provision to delay or repeal a tax on medical devices, but that became a sticking point in the negotiations and will almost certainly be excluded from the final deal, Senate aides said. But the deal would include a one-year delay of another tax associated with the Affordable Care Act known as the reinsurance tax, which employers pay.
Another Republican-backed measure likely to be in the deal would require tighter income verification standards for people who receive subsidies under the new health care law. Under the new guidelines, the Health and Human Services secretary would have to certify that the department can verify income eligibility. The two provisions are the only mentions of the health care law whose defunding has been at the core of Republican demands over the past two weeks.
Many Republicans have argued that if the Senate proposal passes with the solid backing of Republican members — a possibility that seemed probable given Mr. McConnell’s support — it would be an easier sell in the House. But with the country just hours from what could be a crippling default, many Republicans believe that Mr. Boehner will have no choice but to ignore his most vocal members and put whatever passes the Senate up for a vote.
“We’re now backed into a corner,” said Representative Peter T. King, Republican of New York. “We have to do this by Thursday. We have to make it work, but it’s not going to be perfect.”

Reporting was contributed by Ashley Parker and Jonathan Weisman from Washington, Annie Lowrey from Boston and Nathaniel Popper from New York.