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 a U.S. default that could set off a global financial disaster.
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.
But while both Sen. Mitch McConnell of Kentucky, the Republican leader, and Sen. 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 crisis: dismantling the president’s health care law.
“We’ve got a name for it in the House: It’s called the Senate surrender caucus,” said Rep. Tim Huelskamp, R-Kan. “Anybody who would vote for that in the House as Republican would virtually guarantee a primary challenger.”
There have been other showdowns between Republican lawmakers and President Barack 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.
“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,” Obama told reporters at Martha’s Table, a Washington-area food bank.
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 stamp programs. 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.
“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.”
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.
“A lot of these folks are looking into ‘What kinds of options do we have if there is a cash crunch?’” Pattison said. “They are very, very nervous. It’s uncharted territory.”
Investors 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.
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 a U.S. default if one happens.
And Chinese leaders called on a “befuddled world to start considering building a de-Americanized world.” In a commentary 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.”
The Senate could vote on an agreement as soon as Wednesday if Reid and McConnell discuss the deal with their members Tuesday. That would leave little time for the House to debate and vote on what will be a contentious measure.
If a deal is not finalized by the end of the day Thursday, Treasury officials have said, the U.S. 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.
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.
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.
“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,” Goncalves said.
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.
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.
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 Monday that an arrangement hammered out by his Senate colleagues could pass muster among his conservatives.
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 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 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 Rep. Peter T. King, R-N.Y. “We have to do this by Thursday. We have to make it work, but it’s not going to be perfect.”