Debt showdown: Dire warnings, possible agreement?

S&P warns of downgrade in credit rating

Associated Press

WASHINGTON

With time growing short and warnings more dire, the first, fragile signs emerged Thursday of a possible compromise to raise the nation’s debt limit and avert a potentially catastrophic default Aug. 2.

Under a plan discussed by the Senate’s top two leaders, President Barack Obama would receive enhanced authority to raise the debt ceiling at the same time procedures would be set in motion that could lead to federal spending cuts.

Word that Majority Leader Harry Reid, D-Nev., and Republican leader Mitch McConnell of Kentucky were at work on the fallback plan came as Obama and congressional leaders had a fifth-straight day of debt-crisis talks at the White House.

McConnell pronounced the session a good one. “We’re going to continue to discuss a way forward over the next couple of days and see what happens,” he said.

Also on Thursday, credit rating agency Standard & Poor’s said that there is a 50 percent chance it will downgrade the U.S. government’s credit rating within three months because of the congressional impasse over approving an increase in the debt ceiling.

In a statement, the rating agency said it is placing the United States on a credit watch with at least a 1-in-2 likelihood that it will lower the country’s debt rating within the next 90 days.

The S&P action marked the second credit warning in the past two days. On Wednesday, Moody’s Investors Service said it is reviewing the government’s triple-A bond rating because it believes the White House and Congress are running out of time to raise the nation’s $14.3 trillion borrowing limit and avoid default.

S&P had issued a similar warning in April and since that time, the progress in political negotiations has “underperformed” the rating agency’s expectations, S&P sovereign debt analyst Nikola Swann said in an interview.

“We thought the two sides would be closer together,” Swann said.

Obama is having his say today, scheduling his second White House news conference of the week.

House Republicans and Democrats scheduled closed-door meetings of the rank and file to review the spending cuts and tax increases proposed by one side or the other so far.

After weeks of political turmoil, it appeared attempts to avoid a default were proceeding along two tracks — the White House negotiations that appeared near an end, and the fallback that officials said privately presented the stronger opportunity to avert a crisis.

One Republican, speaking on condition of anonymity, said that in the White House talks so far, negotiators had agreed on about $1.5 trillion in deficit cuts, far less than the $2.4 trillion or so needed to meet Obama’s demand that the debt limit go up enough to tide the Treasury over through the 2012 elections.

A summary that House Majority Leader Eric Cantor, R-Va., prepared for the talks earlier in the week showed the bulk of cuts coming from day-to-day operating budgets of federal programs.

Also included were as much as $245 billion from Medicare, including higher premiums for wealthier beneficiaries, and additional savings from skilled nursing homes and home health care.