Obama and leaders reach debt deal; markets up

CUT, CAP AND BALANCE: Senate Minority Leader Mitch McConnell, Republican leader for Kentucky, walking to the Senate floor to announce a deal on the debt ceiling . — PHOTO: AP

CUT, CAP AND BALANCE: Senate Minority Leader Mitch McConnell, Republican leader for Kentucky, walking to the Senate floor to announce a deal on the debt ceiling . — PHOTO: AP  

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Markets reacted favourably to the announcement, with Asian markets jumping on news of the deal. The Nikkei was up nearly two per cent in late-morning trading; the dollar rose against the Japanese yen.

President Obama tempered his comments by noting that “there are still some very important votes to be taken” and that winning House approval would be a particular challenge.

On the conference call, Mr. Boehner sought to portray the new agreement as one heavily tilted toward the Republican call for no new revenue, and he said it met the goal of instituting cuts greater than the amount of the debt limit increase. In a presentation, he said the pact would prevent a “job-killing default” — a warning to lawmakers that failure to raise the limit could add to the bleak employment picture.

“Our framework is now on the table that will end this crisis in a manner that meets our principles of smaller government,” said Mr. Boehner, who said he hoped to get the legislation onto the House floor as quickly as possible. Participants on the call, which lasted about an hour, said that the tone was cordial and that lawmakers expressed less resistance than had been anticipated.

Nancy Pelosi's reaction

At the same time, Representative Nancy Pelosi of California, the former speaker and current Democratic leader, was non-committal about the plan, suggesting that Democrats might not rally behind it. “I look forward to reviewing the legislation with my caucus to see what level of support we can provide,” she said in a written statement.

Senior White House officials said they were hopeful that Congressional leaders from both sides would manage to sell the deal to their parties. While “there are some Democrats who simply don't believe in the necessity of deficit reduction,” one administration official said, “most do. I think it's important as a party to show Americans that we're serious about deficit reduction.”

The Senate seemed an easier sell. Senator Mike Johanns, Republican of Nebraska, said that from the terms of the deal described to him, “I think I will be satisfied and supportive.” After years of work, he noted, Congress has become “serious about cuts in spending.”

As conversations flowed between the White House and Capitol Hill early on July 31, Mr. Reid publicly embraced the compromise that would tie deep spending cuts to a debt ceiling increase even though some Democrats believed the White House has given too much ground to Mr. McConnell and Mr. Boehner.

While lawmakers awaited word of an agreement, talks dragged on. Congressional and administration officials attributed the delay to efforts by Mr. Boehner, Republican of Ohio, to limit immediate reductions in the Pentagon budget and better protect it from future cuts in order to cement votes from defence hawks. He needs those votes to win approval of the plan in the House.

Officials said that Mr. Boehner ultimately did not gain much and that the dispute was settled through an agreement to expand the definition of “security-related” spending to include departments beyond the Pentagon, spreading out potential cuts to the Department of Homeland Security and other agencies.

With 2012 elections in mind

The tense, last-minute negotiations were taking place against a backdrop of uncertainty, with a looming threat of a costly downgrade of the nation's credit rating and with investors worried about the global economic impact of a possible default. The political stakes were unusually high as well, with leaders in both parties staking out positions that may well be central to their re-election chances in 2012. Vice-President Joseph R. Biden Jr. was on the phone all weekend with Republican leaders of the House and Senate.

Referring to the torturous negotiations, Senator Dianne Feinstein, Democrat of California, said: “Sausage making is not pretty. But the sausage we have, I think, is a very different sausage from when we started.”

But not everyone was pleased. “It may be the best we can do,” said Senator Jeff Sessions of Alabama, the senior Republican on the Budget Committee. “But I do not think it's enough.”

With the talks appearing to make progress, the Senate blocked a Democratic proposal for a debt limit increase on a vote of 50-49, falling 10 votes short of the 60 required to limit debate. The plan that ultimately won the support of Congressional leaders was described by officials briefed on its outline. They said the debt limit would be increased by $900 billion in the first instalment, subject to a Congressional vote of disapproval that Mr. Obama would be able to veto. To prevent a default, $400 billion would be added immediately. A second increase of $1.2 trillion to $1.5 trillion would be available subject to a second vote of disapproval by Congress. At the same time, a new joint Congressional committee would be created to find cuts roughly matching the increase in the debt limit.

If the evenly divided committee failed to agree on a plan, Congress would either have to approve a balanced budget agreement to the Constitution or accept an across-the-board cut in spending in line with the committee's goal, with 50 per cent of the savings coming from the Pentagon beginning in 2013. Medicare would also sustain cuts, though the reductions would be capped; Social Security and other programmes would be exempt.

The rationale for picking favoured programmes like the Pentagon for Republicans and Medicare for Democrats was to provide a strong incentive for the new committee to avoid a deadlock and deliver a deficit reduction plan that could clear Congress. ( Robert Pear and Jackie Calmes contributed reporting .) — © New York Times News Service

‘I think it's important as a party to show Americans that we're serious about deficit reduction,' says an administration official.

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