Fears of U.S. default weigh on markets
Washington • Concern deepened in financial markets Tuesday about the potential for a U.S. default as President Barack Obama and House Speaker John Boehner clashed publicly without breaking an impasse over how to reopen the government and pay the nation's bills.
Short-term borrowing by the Treasury Department became twice as expensive Tuesday as it had been the day before, one of the most significant signs of alarm in the bond markets since the financial crisis of 2008.
The stock market, meanwhile, continued the steady slide that began in mid-September, when Boehner, R-Ohio, embraced a right-wing strategy for using the budget battles to try to dismantle Obama's signature health-care initiative. The Standard & Poor's 500-stock index fell 20.67 points to 1,655.45 on Tuesday. The Dow Jones industrial average dropped nearly 160 points to 14,776.53 and has lost nearly 6 percent of its value since hitting a one-year high Sept. 18.
In a hastily planned news conference at the White House, Obama warned that default would be "insane, catastrophic, chaos," and demanded that Boehner take the weight of that threat off the U.S. economy.
Once that happens, Obama said, "I am happy to talk with him and other Republicans about anything." But Obama said he also told Boehner in a telephone call Tuesday morning that "having such a conversation, talks, negotiations shouldn't require hanging the threats of a government shutdown or economic chaos over the heads of the American people."
An hour later, Boehner fired back that Republicans will not yield until Obama comes to the bargaining table.
"I didn't come here to shut down the government, and I certainly didn't come here to default on our debt," Boehner told reporters at the Capitol. But Obama, he said, is seeking "unconditional surrender by Republicans" before "he'll sit down and talk. That's not the way our government works."
Both men spoke in calm tones, striving to appear reasonable. But with the shutdown in its second week and a critical deadline for government borrowing just eight days away, anxiety was building in Washington and on Wall Street.
Just last month, investors were willing to make short-term loans to the U.S. government virtually for free. On Tuesday, the one-month Treasury bill, which paid 0.13 percent interest on Monday, spiked to 0.27 percent - the highest rate since 2008. Borrowing for slightly longer durations has also become much more expensive in recent days.
"What we're seeing is a greater concern that the Congress and the White House will not be able to reach an agreement in order to avoid tripping over the debt ceiling," said John M. Canavan, an analyst with Stone & McCarthy Research.
The national debt hit the $16.7 trillion legal limit in May. Treasury Secretary Jack Lew has since employed a variety of emergency measures to conserve cash. Lew will exhaust those measures on Oct. 17, when he will be forced to rely on a cash balance of about $30 billion and incoming revenue to pay the nation's bills.
Lew has declined to say when the United States is likely to begin missing payments, the definition of default. But independent analysts say it would happen no later than Nov. 1, when the Treasury Department must pay out nearly $60 billion to Social Security recipients, Medicare providers, civil-service retirees and active-duty military service members.
Economists, financial analysts and most policymakers agree that default would be catastrophic because U.S. Treasury bonds form the backbone of global financial markets. "It could well be that what is now a recovery would turn into a recession or even worse," said Olivier Blanchard, the top economist at the International Monetary Fund.
Obama spoke to reporters and answered questions for well over an hour Tuesday, stressing that the consequences of congressional inaction on the debt limit would be far more devastating than lawmakers' failure to fund federal agencies past Oct. 1.
"In a government shutdown, millions of Americans face inconvenience or outright hardship," Obama said. "In an economic shutdown, every American could see their 401(k)s and home values fall, borrowing costs for mortgages and student loans rise, and there would be a significant risk of a very deep recession at a time when we're still climbing our way out of the worst recession in our lifetimes."
Obama ruled out taking unilateral action, by minting a platinum coin or by invoking Section 4 of the 14th Amendment, which states that the "validity of the public debt of the United States . . . shall not be questioned." Setting aside the question of legality, Obama said such actions would create a suspect class of Treasurys that would prompt investors to demand higher interest rates or walk away altogether.
"There are no magic bullets here," Obama said. "There's one simple way of doing it, and that is Congress going in and voting."
Boehner has insisted that the House will not agree to reopen the government or raise the debt limit without concessions from Democrats. Obama challenged him to test that assertion by putting legislation to a vote.
"At minimum, let every member of Congress be on record," Obama said. "And if it fails and we do end up defaulting, I think voters should know exactly who voted not to pay our bills, so that they can be responsible for the consequences that come with it."
On Tuesday, Democratic leaders in the Senate were laying plans to do just that. Senate Majority Leader Harry Reid, D-Nev., introduced a bill that would suspend enforcement of the debt limit through the end of next year, after the 2014 midterm elections.
All 54 Senate Democrats - even those facing tough races - appeared to be falling into line behind the measure. GOP Senate leaders, however, were optimistic about holding their ranks and denying the bill the 60 votes it needs to overcome a GOP filibuster, a test that could come as soon as Saturday.
But during a closed-door lunch meeting Tuesday, veteran GOP senators expressed grave concerns about derailing the bill with no alternative plan for raising the debt limit by the Oct. 17 deadline, according to one Republican in the room.
House GOP leaders, meanwhile, unveiled a new strategy for handling the crisis, proposing to create a 20-member bipartisan "working group" to end the shutdown and raise the debt limit. The working group, to be composed of Republicans and Democrats from the House and the Senate, would be charged with brokering agency funding levels for fiscal 2014, perhaps replacing deep cuts known as the sequester with cuts to federal health and retirement programs.
The measure passed the House 224 to 197, with most Democrats voting no. But Democrats in the Senate quickly dismissed it as "supercommittee 2.0" - after the failed fiscal negotiations of 2011 - and noted that the group's charge includes nothing about raising taxes on the wealthy, a Democratic priority. Before the House could even vote, the White House threatened to veto the measure.
The House also approved a measure to ensure that federal prison guards, U.S. Capitol Police officers and staffers at other agencies currently on the job would be paid as usual for the duration of the shutdown. A separate bill passed by the House over the weekend to provide back pay to furloughed personnel is still awaiting a vote in the Senate.
Both measures that passed Tuesday were presented to the House Republican rank and file in a closed-door morning meeting. After that session, Boehner told reporters that "there's never been a president in our history that did not negotiate over the debt limit," noting that Obama bargained not only with him in 2011 but also with moderate Democrats in 2010. The latter negotiation produced an agreement to create an independent fiscal commission known as Bowles-Simpson.
Boehner refused to say, however, what he hopes negotiations this time would produce.
"I'm not drawing any lines in the sand," he said. "There's no boundaries here. There's nothing on the table. There's nothing off the table. I'm trying to do everything I can to bring people together and to have a conversation."
- - -
Washington Post staffers Paul Kane, Ed O'Keefe and Jackie Kucinich contributed to this report.