Treasury says Congress has month to reach debt deal

WASHINGTON Fri Jul 1, 2011 4:53pm EDT

Senate Majority Leader Harry Reid (D-NV) speaks to the media on U.S. budget talks next to Sen. Charles Schumer (D-NY) on Capitol Hill in Washington June 23, 2011.  REUTERS/Yuri Gripas

Senate Majority Leader Harry Reid (D-NV) speaks to the media on U.S. budget talks next to Sen. Charles Schumer (D-NY) on Capitol Hill in Washington June 23, 2011.  

Credit: Reuters/Yuri Gripas

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WASHINGTON (Reuters) - The U.S. Treasury on Friday stuck with an August 2 deadline for Congress to approve new borrowing and avoid a default, applying more pressure on lawmakers to break partisan gridlock and reach a budget deal.

The Obama administration's estimate of when the U.S. would exhaust its ability to borrow money held steady from its last projection, and came a week after deficit reduction talks between Republicans and Democrats collapsed over tax hikes.

Treasury has shifted the date before, prompting some Republicans to question whether the country would actually face a default on its debt if the ceiling were not raised in time.

The White House wants a deal even sooner. Democratic officials said a deal needs to be in place by July 22 to give Congress enough time to pass it, though some budget experts question whether that would even yield enough time.

Treasury Secretary Timothy Geithner has warned of huge risks if Congress fails to raise the $14.3 trillion debt ceiling by August 2, potentially triggering a default that could send shivers through an already-fragile banking system.

"The Treasury Department continues to project that the United States will exhaust its borrowing authority under the debt limit on August 2, 2011," assistant Treasury secretary for financial markets Mary Miller said in a statement.

"Secretary Geithner urges Congress to avoid the catastrophic economic and market consequences of a default crisis by raising the statutory debt limit in a timely manner," she said.

Fears of a default, which could disrupt everything from debt payments to retirement benefits, have been rising after Republicans walked out of budget negotiations led by Vice President Joe Biden last week.

The political impasse has driven credit rating agencies to warn about possible downgrades to the United States's top-notch AAA credit rating.

A U.S. default could spark a new financial crisis. Economists say interest rates could spike, equity markets might plunge along with the value of the dollar, and the country could fall back into a recession.

'VINDICTIVENESS'

Biden expressed frustration at the politicking behind the budget talks. In a speech in Las Vegas to Teamsters union members he also sharply criticized Republican efforts to protect tax breaks for the wealthy at the expense of seniors.

"This is heavy politics. And part of this is just vindictiveness," said Biden, whose bipartisan negotiating group had agreed to between $1 trillion and $2 trillion in cuts over 10 years before Republicans walked out.

Though the two sides have agreed to trillions of dollars in cuts, they are holding firm to some entrenched positions.

Republicans refuse to consider any tax hikes, arguing that they would dampen an already sputtering economic recovery. On the other side of the aisle, Democrats do not want to see cuts to the expensive Medicare healthcare plan for the elderly.

After the Biden talks collapsed, President Barack Obama took a bigger role, speaking to Senate leaders from both parties. He also chided lawmakers planning to go on a holiday break, saying they needed to stay to work on a deal.

In response, Senate Democratic Leader Harry Reid canceled the planned July 4 Independence Day week-long break. The House of Representatives will also cancel its planned break the week of July 18 if needed, House Republican Leader Eric Cantor's office said.

But Republicans are complaining that much of the discussion has been behind closed doors. Senators Jeff Sessions and Orrin Hatch, the top Republicans on the Senate Budget and Finance committees, sent Obama a letter on Friday asking him to make deficit proposals public so they can be reviewed and debated.

White House economic officials are due to attend meetings on Capitol Hill next week. Obama and Biden have been invited but it was not clear if they would attend.

Senate Democrats are weighing several options including a scaled-back budget deal that would avert a looming default but force Congress to tackle the politically toxic issue again before the 2012 elections.

But a short-term deal, which is not popular with credit rating agencies, could divide Republicans who disagree over the proposal.

(Additional reporting by Steve Holland, Andy Sullivan and Donna Smith)

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