Bloomberg News

McConnell’s ‘Last-Choice’ Debt Proposal Gets Mixed Reviews

July 13, 2011

(Updates with Conrad and other comments from lawmakers, White House, beginning in fifth paragraph.)

July 13 (Bloomberg) -- Senate Republican leader Mitch McConnell’s offer to hand President Barack Obama unilateral power to raise the national debt ceiling got a warmer reception on Wall Street than it did on Capitol Hill, where lawmakers on both sides of the aisle raised concerns.

While the proposal gave some market analysts confidence that the U.S. will avert default, Republicans like Senator Tom Coburn and some Democrats like Senator Kent Conrad rejected it as a political hoax that fails to address the debt. Leaders from both parties in the House and Senate either offered cautious praise or held back from publicly criticizing the plan.

In an effort to put the burden on the White House to identify future spending cuts, McConnell offered his “last- choice” plan as an alternative to deficit-reduction talks at the White House that have yielded little progress. Officials from both parties are scheduled to meet again today at 4 p.m.

“It would make it much easier to raise the debt limit, which should reassure markets,” Gus Faucher, director of macroeconomics at Moody’s Analytics in West Chester, Pennsylvania, said in response to an e-mail today. “It does imply much greater willingness to make a deal, which is a positive.”

‘Worst Ideas’

The reaction from some lawmakers was negative. Conrad, who heads the Senate Budget Committee, called the McConnell plan “one of the worst ideas I have ever heard.” Any plan that extends the debt limit without doing anything about the debt “is an abdication of responsibility that is stunning,” said the North Dakota Democrat.

“That dog don’t hunt,” said Representative Allen West, a freshman Republican from Florida. “Seems like an acquiescence to me.”

The proposal’s chances of passing the Republican-controlled House are obscured because of objections from Tea Party and freshman Republicans like West. Still, Mark Zandi, chief economist at Moody’s Analytics, said markets are comforted, at least to a degree, because the plan suggests that lawmakers recognize the gravity of a default.

“As soon as I heard that, I thought, well, that’s positive,” Zandi said in an interview.

Ethan Siegal, who tracks Washington policy for institutional investors, said McConnell’s plan adds to “the market’s already decided certainty” that there will be some resolution that prevents a default of government obligations.

‘Going to Get Done’

“Investors firmly believe it’s going to get done,” said Siegal, who is president of the Washington Exchange.

Senate Majority Leader Harry Reid described McConnell’s proposal as “thoughtful and unique,” even as he called on both sides to pull together on a more ambitious deal. House Minority Leader Nancy Pelosi said the plan by the Kentucky Republican has some “merit” because it recognizes the debt ceiling must be lifted.

Nonetheless, the absence of an agreement after several days of talks among congressional leaders and the president augurs a possible breakdown, said analyst Chris Krueger.

Even with McConnell’s alternative, “we are no closer to a deal, votes, or a raise in the debt ceiling with the sand continuing to run out of the hourglass,” Krueger, an analyst at MF Global Washington Research Group, told clients in a note. He said the odds are 40 percent that Congress won’t pass a debt- ceiling bill before the Treasury’s stated Aug. 2 deadline for raising the borrowing limit to avert a U.S. default.

‘Major Crisis’

A newsletter to clients from FBR Capital Markets today stated “roughly, a 25 percent probability that a final deal will not be reached by the Aug. 2 deadline.”

Federal Reserve Chairman Ben S. Bernanke told Congress that a failure by Congress to raise the nation’s $14.3 trillion debt limit would lead to a “major crisis” and throw “shock waves” through the financial system. Bernanke responded to a question at a House Financial Services Committee hearing.

White House spokesman Jay Carney said today that the McConnell plan “is not the preferred option,” although the administration doesn’t reject it out of hand. The White House would prefer a more comprehensive plan, he said.

“Bigger is better,” Carney told reporters.

The White House is holding out hope the president can reach a deal of $2.5 trillion or larger that includes revenue increases and they expect other backup proposals between now and Aug. 2, said a Democrat familiar with the negotiations.

Low Bond Yields

Even as politicians haggle over the debt ceiling, government bond yields are at about the lowest this year. The yield on 10-year Treasuries was 2.90 percent as of 1:32 p.m. New York time after falling to a low this year of 2.81 percent on July 12. That compares with an average of 7 percent during the past four decades.

McConnell said his plan is intended to “do the responsible thing and ensure the government doesn’t default on its obligations.”

The proposal would let the president increase the limit in three steps unless Congress disapproves by a two-thirds majority -- a near impossibility with the Senate controlled by the Democrats -- while Obama would also be required to offer spending reductions. Those cuts would be advisory, and the debt- ceiling increase would occur regardless of whether lawmakers enact the cuts, McConnell said.

Onus on Obama

Don Stewart, a spokesman for McConnell, said the plan would let Obama raise the debt limit while putting the onus on him and congressional Democrats to cut spending.

At the same time, Republicans wouldn’t have to agree to tax increases. The proposal would force Democrats to cast multiple votes to raise the debt ceiling before the next election, while giving Republicans the chance to vote against that without risking a default.

The increases would come in amounts of $700 billion, $900 billion and $900 billion, McConnell said. They would occur over the remainder of Obama’s presidential term, in keeping with the president’s call for an increase in the debt limit that would carry through the 2012 elections.

Speaker John Boehner told Fox News he wasn’t sure it could pass the House. “Senator McConnell said it’s a last-ditch backup plan,” Boehner said yesterday, according to a release from the network. “When we get here a couple weeks from now, we may be looking for all kinds of ideas.”

‘Real Long Shot’

Senator Mike Lee of Utah, a Republican who doesn’t support raising the debt limit unless it’s paired with a constitutional amendment to balance the budget and immediate spending cuts, said the plan “seems like a long shot -- a real, real long shot.”

Carney said McConnell’s plan is an acknowledgement that “there is no alternative to the United States honoring our obligations.” He said the president is focused on a mechanism “to make sure that Congress takes action to do that.”

Grover Norquist, head of the anti-tax Americans for Tax Reform, said the Republican leader’s proposal was an acceptable “fallback plan.”

Norquist said the requirement that Obama accompany a debt- limit increase with a list of proposed spending cuts would accomplish “an incredibly important thing” by “smoking out” Obama on how he would cut the budget.

“If he presents a phony plan, the world can see and we go into the 2012 election and deal with those Democratic senators and president who didn’t take this seriously,” added Norquist, who has said most House and Senate Republicans have signed a pledge he distributes vowing not to raise taxes.

Patrick Griffin, who was President Bill Clinton’s chief congressional lobbyist from 1994 to 1996, said McConnell’s proposal shows the Republican leader’s leverage in the negotiations is slipping.

“I would read it as weakness, at least on McConnell’s part,” Griffin said. “He blinked.”

--With assistance from Roger Runningen, Brian Faler, Julie Hirschfeld Davis, Margaret Talev, James Rowley, Peter Cook, Mark Silva and Lisa Lerer in Washington and John Detrixhe in New York. Editors: Mark McQuillan, Robin Meszoly

To contact the reporters on this story: Mike Dorning in Washington at mdorning@bloomberg.net; Heidi Przybyla in Washington at hprzybyla@bloomberg.net

To contact the editor responsible for this story: Mark Silva at msilva34@bloomberg.net


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