Boehner Proposes Six-Week Extension on Debt Ceiling Limit but Shutdown Continues
Republican leaders have backed away from their immediate threat to freeze US debt limits, offering the first real hope of a wider solution to the budget crisis that continues to paralyse much of the federal government.
Wall Street markets surged on Thursday after House speaker John Boehner emerged from a party meeting to announce a proposal that would allow a six-week extension to the debt limit that would otherwise be reached by 17 October.
But Republicans refused to bring an end to the separate impasse over the government shutdown that has dragged on since the beginning of October, repeating their insistence that they will only pass a resolution to authorise continued government spending if Barack Obama agrees to negotiate an array of concessions.
Until now, the president has said he would only negotiate if Republicans agreed to lift both threats – extending the debt limit and passing a continuing resolution without strings attached.
Boehner and other Republicans are due to meet Obama at the White House on Thursday afternoon, and hope that their short-term offer on the debt ceiling might enough to persuade the president to drop his demand to end the shutdown first.
"We are hopeful that that this is the beginning of meaningful discussions," said Cathy McMorris Rodgers, chair of the Republican House conference.
The White House gave a cautious welcome to the Republican offer, but stressed it would need to see the exact wording before deciding whether it was enough to proceed with formal talks. The president is "happy that cooler heads seem to be prevailing," said spokesman Jay Carney. "We would prefer to see a longer term resolution," he added.
Republicans have been under intense pressure from business leaders and donors to avoid a possible US default by removing the debt ceiling threat from their arsenal. But there is no guarantee that the more conservative Republicans in Boehner's caucus will support it.
US stock markets soared on the news. The Dow Jones Industrial Average had risen over 230 points (1.56%) shortly after Boehner's press conference ended. The S&P 500 rose over 27 points (1.67%).
PNC Bank senior economist Gus Faucher said: "This is an indication at least that we will get a deal on the debt ceiling. That's what has been worrying investors more than the government shutdown."
Faucher added, however, that the uncertainty was already a drag on the economy, and failure to reach a deal on the debt limit would a "significant negative and long lasting impact" on the economy.
Bruce Bittles, the chief investment strategist at RW Baird & Co, said investors had become more concerned about the possibility of a debt default in recent days, but that in general they were "complacent" and had discounted the possibility of a default despite the war of words in Washington.
During the last row over the debt ceiling in 2011, markets the S&P dropped close to 20%. "So far we have seen modest selloffs. My fear is that if we are just kicking the can down the road, that's not a solution," Bittles said.
Earlier on Thursday the Treasury secretary, warned on Thursday there were unpredictable consequences of the continued brinksmanship, including the possibility that the US could run out of cash within days.
Lew accused Republicans of underestimating the danger of inadvertently triggering a stampede among investors that could rapidly drain remaining reserves.
More than $100bn of the US debt, known as Treasury bonds, is typically reissued every week as investors roll over their loans to the government. This process is usually routine and does not add to the $17tn US debt pile, but simply refinances a portion of it.
But markets have already been spooked by Republican threats to refuse to extend the debt limit if they do not extract concessions on healthcare reform. Short-term borrowing costs nearly tripled in a bond auction on Tuesday as investors feared there was a risk that interest and capital repayments could be missed.
A similar wariness to roll over bonds expiring next week could exhaust a $50bn cash reserve at any point, warned Lew. "Trying to time a debt limit increase to the last minute could be very dangerous," he said in written congressional testimony. "If US bond holders decided that they wanted to be repaid rather than continuing to roll over their Treasury investments, we could unexpectedly dissipate our entire cash balance."
Answering written questions by members of the Senate finance committee, he added: "I very much fear that miscalculation is something that could have devastating consequences. It is impossible to predict with any degree of accuracy when we will run out of money."