US Senate nears deal; House uncertain

WASHINGTON—Senate leaders on Monday night neared the completion 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 an American 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 clear that the most conservative members of the House of Representatives were not going to go along quietly with a plan that does not accomplish their goal from the outset of this two-weekold crisis—dismantling President Barack Obama’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, Republican of Kansas. “Anybody who would vote for that in the House as Republican would virtually guarantee a primary challenger.”

Obama warning

There have been other showdowns between Republican lawmakers and President Obama that went to the last minute. In 2011, for instance, 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 financial 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, aWashington-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 stamps.

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 borrowingmore difficult and costly for states.

‘Pretty nervous’

“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 somuch.”

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 on 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.

Contingency plans

At the same time, asset managers and banks began taking steps to be ready if the US Treasury 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 an American default if one happens.

For their part, Chinese leaders called on a “befuddled world to start considering building a de-Americanized world.”

In a commentary on Sunday, the staterun 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.”

Senate vote

The Senate could vote on an agreement as soon as Wednesday if Reid and McConnell discuss the deal with their members on 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 completed by the end of Thursday, Treasury officials have said, the US 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 marketswould pronounce judgment.

Wall Street sentiment may be in evidence even before a vote, when the Treasury sells new 13- and 26week bonds.

Behind the scenes

If investors are hesitant to buy the bonds, 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 signswere 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 Treasury, 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.