Market bear looms over talks on debt ceiling

House Majority Leader Eric Cantor (R-Va.) on Monday warned of an urgent need to strike a deal to raise the debt ceiling, telling reporters that “we don’t want the markets to make this decision for us.”

Cantor, who is representing House Republicans in talks led by Vice President Biden, acknowledged that there is a growing concern the financial markets will be rattled and interest rates will spike if congressional leaders cannot reach an agreement before Aug. 2, the deadline the Treasury Department has set for lifting the nation’s $14.3 trillion debt limit.

{mosads}The majority leader reiterated, however, that spending cuts and reforms are an essential requirement to a deal that the markets, and the public, find credible. 

“We don’t want the markets to make this decision for us, because that’s exactly what we’re trying to avoid in saying we’ve got to reduce spending,” Cantor said. “You’ve got to implement reform.” 

He said the “urgency” of the looming deadline is something “everybody assumes.”

Cantor said if Congress simply raises the debt ceiling without spending cuts, which the House has already rejected, tax hikes would be on the horizon.

“If you don’t, if you just check the box and raise the debt ceiling, the markets take care of it for you. Interest rates will skyrocket, and there will be no way for us to see any return to growth anytime soon. We’ll have to raise taxes and the rest.”

Republicans have pointed to warnings from major credit rating agencies that U.S. debt will be downgraded if the debt ceiling isn’t raised and if a long-term deficit-reduction plan isn’t put in place. 

Yet GOP leaders will also have to persuade conservative hard-liners in their conference, who have raised doubts about the necessity of lifting the debt ceiling.

 The Biden group will meet three times this week as lawmakers try to arrive at a framework for an agreement for raising the debt limit before July 4. Cantor acknowledged the Aug. 2 deadline but refused to set a firm deadline for striking a deal within the Biden group. 

“It is about getting it right,” he said. “It’s about making sure you get the necessary amount of spending cuts and reforms.”

In a rare moment for a GOP leader, Cantor praised Biden’s leadership of his ad hoc committee.

“We have had some really significant and substantive discussions in these talks, and I think the success of these talks thus far is due to the vice president and the way he has conducted these meetings,” Cantor said.

“I’m very impressed with the way he’s conducted these meetings,” he added. Biden, he said, “does like to talk a lot. But I guess all of us do, or we wouldn’t be here.”

He said the famously long-winded vice president has “conducted these meetings in a way that’s kept the ball rolling.”

Cantor also said he wants to hold just one vote to raise the debt limit, rather than multiple votes for short-term increases. Because Republicans are demanding spending cuts that exceed additional borrowing authority, a single vote extending the debt ceiling through the 2012 elections would mean spending cuts in excess of $2.4 trillion.

“It’s my desire to have one debt-ceiling vote,” Cantor said, though he noted that decision would ultimately rest with Speaker John Boehner (R-Ohio).

“I think we can accomplish trillions of dollars in spending reductions and then put the necessary reforms in place where you actually are going to achieve a lot more than that.”

Some conservatives have pushed for incremental debt-ceiling votes as a way to extract more concessions on spending cuts from Democrats.

The majority leader said the Biden group is focused primarily on achieving cuts within the traditional 10-year window for federal budgeting, but he allowed that cuts could be pushed even further into the future with the inclusion of fiscal process reforms, such as a cap on spending.

 Former Senate Budget Committee Republican staff director Steve Bell, now with the Bipartisan Policy Center, said that Cantor’s remarks demonstrate that the leadership is trying to move the caucus away from an approach, advocated by Sen. Pat Toomey (R-Pa.), that would allow the debt ceiling to be breached.

 Under Toomey’s approach, other payments would be prioritized below payments to bondholders, thereby avoiding a technical default on the debt.

Bell said that most economists and Wall Street understand that passing Aug. 2 without congressional action would mean Treasury would have to force the closure of most government buildings and suspension of most federal government workers, even if bond payments are made.

Confidence in the U.S. government would plummet if that happened, he said. 

“So far it is my sense that the House leadership understand this, the ramifications of something like the Toomey bill,” Bell said. 

 The Policy Center has scrutinized the U.S. ledger and found that Aug. 2 is indeed the drop-dead date due to a massive Social Security payment due on Aug. 3. In the 1990s, Congress passed a special short-term increase in the debt ceiling to meet a similar payment, he noted.