Analysis: Debt limit talks embroiled in chaos

WASHINGTON Thu May 12, 2011 3:36pm EDT

The full moon rises behind the Capitol Dome in Washington March 19, 2011. REUTERS/Hyungwon Kang

The full moon rises behind the Capitol Dome in Washington March 19, 2011.

Credit: Reuters/Hyungwon Kang

WASHINGTON (Reuters) - Rival plans to cut the deficit emerge almost daily: gangs, panels and commissions all trying to reach an elusive deal. There are splits between Republicans and Democrats, and mixed messages from all sides.

With pressure mounting in Washington for a budget agreement that can clear a path to raise America's debt limit, only one thing is clear: nobody yet knows how to get there, and a deal appears as far off as ever.

"Nobody can get a handle on this because there is no handle," said a veteran Republican strategist. "The overall picture really is as muddied and unclear as it looks. Anybody who says they know what's going to happen here is lying. They don't."

The United States is set to reach its $14.3 trillion debt limit on Monday, and will only be able to avoid default until August 2, according to the Treasury. Efforts to forge a bipartisan deficit-reduction package as a step toward Congress raising the borrowing limit are in turmoil.

A thicket of plans to cut the deficit, which is expected to hit $1.4 trillion this year, have emerged in recent days with virtually no chance of passage in Congress.

A bipartisan group of senators know as the "Gang of Six," which has been trying to reach a detailed deficit-cutting deal for five months, seems to be fading from view.

Republicans in the House of Representatives are badly split, its leadership struggling to send a unified message.

Last week, the architect of the Republican budget plan, congressman Paul Ryan, appeared to pull back from his proposal to privatize Medicare, the government-run program for the elderly. Yet in a speech to Wall Street on Monday, House Speaker John Boehner, the top Republican in Congress, said Medicare was very much on the table.

ONLY BOTTLED WATER ON OFFER

Across the aisle, Democratic liberals and moderates are at loggerheads over how far to cut entitlement programs such as Medicare, and how deep spending cuts should go.

The White House and Democrats insist that tax increases, as well as spending cuts, must be part of a deficit deal. Republicans say tax hikes are "off the table" and demand swingeing reform of Medicare, a proposal opposed by most Democrats and the White House.

Written off by many in Washington just a week ago as little more than political theater, there is now a growing consensus that the only real chance for a deal lies with a seven-member panel chaired by Vice-President Joe Biden, which met for a third time on Thursday.

Chris Van Hollen, one of four congressional Democrats in the group, said progress was going to be painfully slow.

"The approach we are taking is one step at a time," Van Hollen told Reuters, adding that the atmosphere inside the talks had been serious and purposeful. "Just bottled water on offer -- no bread," he said.

Van Hollen said the first two meetings had focused on "areas of agreement" but that soon they will have to move into painful negotiations on the controversial items of taxes and entitlements such as the Social Security retirement program.

"We will have to see as the process unfolds which areas the sides may give ground on," he said.

THROWING IDEAS AT THE WALL

Former Senator Alan Simpson, the Republican co-chair of President Barack Obama's deficit-reduction commission, said: "You can see how tough this is going to be for the Biden group. And if they can't get this done -- forget it."

Maya MacGuineas, president of the Committee for a Responsible Federal Budget, said she had been holding almost daily meetings with members of Congress.

"People are just throwing ideas at the wall to see what sticks," MacGuineas said.

Boehner is under enormous pressure from two opposing, "unforgiving" sides, the Republican strategist said -- Wall Street, which wants the debt limit raised soon to avoid turmoil in the bond markets, and House conservatives aligned with the Tea Party movement, who refuse to vote for raising the borrowing cap without drastic spending cuts.

Boehner tried to reassure both sides in his Monday speech. He insisted any rise in the debt limit must be accompanied by even greater cuts in spending, while also conceding that a failure to raise the debt limit would be "irresponsible."

"The Republican leadership wants to do the right thing in raising the debt limit" the strategist said. "But they don't want to destroy themselves politically."

Strategists on both sides still believe a deal will be struck to raise the debt ceiling -- but only after Democratic and Republican leaders have dragged out negotiations to demonstrate their toughness.

Many believe that only when President Barack Obama, Boehner and Harry Reid, the Democratic Senate leader, forcefully enter negotiations will there be a chance for a deal.

"A deal is more likely than not -- but I wouldn't even put it at 80 per cent likely," said Norm Ornstein, a veteran congressional analyst at the American Enterprise Institute think-tank.

"The most likely scenario is that after a lot of gut-wrenching, heart-stopping moments, some kind of consensus will emerge."

(Editing by Ross Colvin and Christopher Wilson)

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