No Dealing On The Debt Ceiling, Part 35

Talks on the debt ceiling will resume this weekend as President Obama lays out three options that are on the table.

President Barack Obama, insisting "it's decision time," Thursday told congressional leaders they've got three options to resolve an impasse over the debt limit — and two may have support among leaders of both parties.

Obama told lawmakers he's still seeking the "largest deal possible," to cut the deficit by as much as $4 trillion and raise the debt ceiling, said a Democratic official familiar with the talks, but the president didn't rule out cutting the deficit by $2 trillion or a third option of doing "significantly less on the deficit" while still increasing the debt limit. The Democratic official spoke on condition of anonymity because of the sensitivity of the ongoing talks.

The president did, though, convey a sense of urgency, telling congressional leaders, "We need concrete plans to move this forward." 

He told lawmakers to talk with their members, saying he wants them to identify a potential resolution over the next 24 to 36 hours, people familiar with the talks said.

Meanwhile, Standard & Poor's has joined Moody's in warning that refusal to raise the debt ceiling soon will result in the US losing its top credit status.

The U.S. may have its AAA credit rating cut by Standard & Poor’s Ratings Services, which said there is a growing risk of a policy stalemate enduring beyond any near-term agreement to raise the debt ceiling.

The long-term rating may be lowered by one or more notches into the AA category in the next three months if S&P concludes Congress and President Barack Obama’s administration haven’t achieved a credible solution to the rising U.S. government debt burden and aren’t likely to achieve one in the foreseeable future, according to a statement today.

“Owing to the dynamics of the political debate on the debt ceiling, there is at least a one-in-two likelihood that we could lower the long-term rating on the U.S. within the next 90 days,” S&P said. 

Yeah, in other words, S&P is putting the odds of having to lower the US's credit rating at upwards of 50/50.   Markets were not happy with that news, losing about half a percentage point for the day.  Time's running out.  The President and Republicans have basically two weeks to work out a deal or the game's over.

I still believe they will.  Wall Street will have to make it painfully clear, I guess.  Credit default swap spreads on US debt are up to 56 basis points.  Bit arcane, but basically that's the highest they've been in nearly 18 months, and that's not good.  At the height of the credit crunch it was close to 100 bps.  Wall Street is beginning to get nervous.  That probably explains why Harry Reid is playing good cop.

You'll recall that McConnell's original vision was heavy on the politics, but substantively amounted to allowing President Obama to raise the debt limit with no policy strings attached -- no spending cuts, no tax increases, nada. The rub was that Obama would have to raise the debt ceiling in three increments, and notify Congress of his intent each time. Each time, Congress would vote, or attempt to vote, to stop him from doing so. Each time, he'd veto. Each veto would be sustained by a minority vote in both the House and Senate. In addition, each time, he'd have to draw up a menu of aspirational spending cuts of his choice, in the amount by which he's raising the debt limit.

In an unexpected turn, Reid is proposing to give McConnell back the "clean," no-strings-attached aspect of his offer, according to a highly-placed Democratic source.

"We want to see what cuts are agreed to [in the White House meetings] and pass those," the source said. "That's the attitude now."

McConnell would have to give, too -- possibly by relenting on the politics, which as currently envisioned would force Dems to take symbolic debt ceiling votes well into election year. But another option would be to take the cuts identified in the White House meetings -- expected to be in the vicinity of $1.5 trillion -- and split them up, so they could be attached to the three debt-limit votes.

"That way, they're not voting to raise the debt limit, they're voting for deficit reduction," the source added.

So we'll see what happens.