Obama: Congressional leaders approve debt-limit increase

President Barack Obama said tonight that leaders of both parties in the U.S. House and Senate had approved an agreement to raise the nation’s debt ceiling and cut the federal deficit that must now be sold to Congress.

“The leaders of both parties in both chambers have reached an agreement that will reduce the deficit and avoid default,” Obama said at the White House. “This compromise does make a serious down payment on the deficit-reduction we need. Most importantly it will allow us to avoid default.”

Congressional leaders are sifting through the details of the tentative bipartisan agreement to raise the debt ceiling by $2.1 trillion, sufficient to serve the nation’s needs into 2013. They are preparing to sell to members the deal to cut $917 billion in spending over a decade, raising the debt limit initially by $900 billion, and to charge a special committee with finding another $1.5 trillion in deficit savings by the year’s end. They confront an Aug. 2 deadline for approval.

“This goes a long way to reducing the risk of default by the U.S. government,” Tom Quarmby, head of regional banking research at Barclays Capital in Hong Kong, said in an interview with Bloomberg Television. While many hurdles remain, the deal “gets them out of a lot of trouble in the near term,” he said.

The dollar and oil prices climbed and gold fell. U.S. currency rose 1.3 percent to 77.79 yen and 0.2 percent to $1.4376 per euro at 9:44 a.m. in Tokyo. Gold slid 1.1 percent to $1,610.70 an ounce, and crude oil for September delivery rose 1.6 percent to $97.19 a barrel on the New York Mercantile Exchange.

Reid Endorsed Deal

Senate Majority Leader Harry Reid endorsed the accord among Republican leaders and the Obama administration even as negotiators were working out the final details. Senate Minority Leader Mitch McConnell told senators tonight that the U.S. will not default on its obligations.

The framework would raise the $14.3 trillion debt ceiling through 2012, and call for enactment of a law shaving another $1.5 trillion from long-term debt by 2021 — or institute punishing reductions across all government areas, including Medicare and defense programs, according to congressional officials.

Across the Capitol, House Minority Leader Nancy Pelosi of California said she was reserving judgment on the plan until she could see details and discuss them with fellow Democrats, some of whom were already voicing concern that the package calls for steep spending cuts with no tax increases to help shrink the deficit.

“We all may not be able to support it — or none of us may be able to support it,” she told reporters at the Capitol.

Out of Sight

House Speaker John Boehner of Ohio and Senator Mitch McConnell of Kentucky, the Republican leader, stayed out of sight as they hammered out the accord, as some in their ranks criticized the plan as doing too little to rein in the debt.

“We’re really, really close to an agreement, and we’ll let you know when we get it,” McConnell told reporters as he left the Senate chamber today. Earlier, he said Republicans and President Barack Obama had made “dramatic progress” on the compromise this weekend.

Boehner was to brief rank-and-file Republicans tonight by conference call as aides worked to complete the plan and draft legislative language, Republican aides said.

Stock Futures Surge

U.S. stock-index futures surged, indicating the Standard & Poor’s 500 Index may rebound from its worst weekly loss in a year, amid optimism lawmakers will reach an agreement in time to avert a default on Aug. 2, when the Treasury Department has said it will run out of cash to pay bills.

S&P 500 futures expiring in September rallied 1.1 percent to 1,305.4 at 8:07 a.m. in Tokyo. Dow Jones Industrial Average futures climbed 154 points, or 1.3 percent, to 12,242.

The White House cautioned earlier today that there still was no compromise. Communications Director Dan Pfeiffer said in a Twitter message that the two sides have “important issues to work out.”

Under the emerging plan, a bipartisan congressional super- committee would be charged with proposing deficit savings of $1.5 trillion over a decade by late November, and its recommendations would receive expedited consideration and a certain vote by Christmas. Negotiators were still working to finalize details of the so-called trigger mechanism meant to ensure the deficit-reduction package materialized.
Spending Cuts

Even if Congress didn’t produce deficit savings, spending reductions wouldn’t be triggered until after fiscal 2012, according to an official familiar with the plan. If the automatic cuts were instituted, Congress and the president could choose to replace the defense reductions with other cuts, the official said.

With just two days left before the Treasury Department has said the nation would default without additional borrowing authority, both sides had made concessions in search of an accord. Republicans dropped their insistence on withholding some of the borrowing authority until future spending cuts had been made and a balanced budget amendment to the Constitution had been passed by both chambers of Congress, according to a person familiar with the talks.

Christmas Deadline

The White House agreed to forgo an automatic tax increase, a sticking point for Republicans, as one of the consequences to kick in if no debt-reduction law is enacted by Christmas, according people familiar with the discussions.

Obama has an opportunity to increase revenue in the future if he opts to allow the tax cuts enacted under George W. Bush to expire as scheduled in 2013. Even if Obama lost his re-election campaign next year, he could veto legislation to extend those cuts before leaving office — raising $3.5 trillion.

Both sides encountered resistance to the emerging deal from within their own ranks.

Republican Senator Ron Johnson said he was “highly concerned” about the size of the cuts being discussed, saying they were too small to make a real difference in reining in the debt.

“I’m afraid this is not going to fix the problem, and that’s the one reason I came here,” said Johnson, a first- termer elected with Tea Party support.

Socially liberal groups and lawmakers expressed anger at the package because it omits revenue increases while cutting deeply into government spending and threatening still more reductions to safety-net programs such as Medicare.

Working People

“This deal does not even attempt to strike a balance between more cuts for the working people of America and a fairer contribution from millionaires and corporations,” Representative Raul Grijalva, the Arizona Democrat who leads the Progressive Caucus, said in a statement. “I will not be a part of it.”

The Progressive Caucus and the Congressional Black Caucus scheduled a news conference tomorrow to discuss their opposition to the proposed deal.

In a nod to fiscal conservatives and Tea Party-aligned lawmakers who have championed adding a balanced-budget amendment to the Constitution, the proposed agreement would call for a vote on such a measure. It has little chance of being adopted because amendments require two-thirds majorities for passage and many Democrats are opposed.

Still if no deficit-reduction deal is enacted, the deal provides that passage of a balanced-budget amendment by both houses would prevent the automatic spending cuts from going into effect, according to the Republican aide. That would give Republicans a chance to renew their push for the amendment at the height of 2012 campaigns, arguing that it was the only alternative to painful spending reductions.

‘Balanced Approach’

Obama and congressional Democrats have insisted that any deal be a “balanced approach” that includes revenue, raising questions about whether the president would find substantial support from his party for the plan.

“You’re going to have to have closing of tax loopholes. You’re going to have to have revenue produced to close the deficit,” David Plouffe, a special adviser to Obama, said on ABC’s “This Week.”

While the compromise shaping up will probably assuage immediate concerns about default in financial markets, “this relief will be short,” said Mohamed A. El-Erian, chief executive officer of Pacific Investment Management Co., the world’s largest manager of bond funds.

If Standard & Poor’s “sticks to what it said, it will downgrade” the U.S. debt following the deal, El-Erian said in an interview on ABC News “This Week.”

S&P, which has given the U.S. a top AAA ranking since 1941, said on July 14 that the chance of a downgrade within three months is 50 percent, and a reduction may occur as soon as August if there isn’t a “credible” plan to reduce the nation’s deficit.

The agreement “does nothing to restore household and corporate confidence, so unemployment will be higher than it would have been otherwise,” El-Erian said. “Growth will be lower than it would be otherwise. And inequality will be worse than it would be otherwise.”

–Bloomberg News–