WASHINGTON/CHICAGO The United States reached the legal limits of its borrowing authority on Monday as a top Republican increased his party's demand for deep spending cuts as part of any increase.
The remarks by Representative Paul Ryan, the top budget writer in the House of Representatives, underscored the divisions that Republicans and Democrats will have to overcome in order to raise the $14.3 trillion debt limit and avoid a default that would roil markets across the globe.
The Treasury Department said it was dipping into federal pension funds to pay the country's bills, one of several emergency measures that should stave off a default until early August.
Congress is not expected to raise the debt cap until sometime this summer as lawmakers search for a deal that would allow them to back an increase while showing voters that they are taking steps to get debt under control.
Speaking to top financial executives at the Economic Club of Chicago, Ryan said any deal would have to include spending cuts that are larger than the amount of the debt-ceiling increase -- a tougher stance than conditions that have been laid out previously by other party leaders.
"For every dollar the president wants to raise the debt ceiling, we can show him plenty of ways to cut far more than a dollar of spending," Ryan said.
Outside the event, about 100 protesters waved signs reading "Hands off Medicare" -- a reference to the popular health program that would face cuts under Ryan's budget plan. With the 2012 campaign season already under way, Democrats see an opportunity to pick up votes by bashing that approach.
DEMOCRATS LAUNCH NEW ATTACK
The Democratic Congressional Campaign Committee, which aims to win back control of the House, unveiled a new campaign with the stark slogan: "Vote Republican, End Medicare."
But House Democratic Leader Nancy Pelosi said the program should not be immune from budget talks as health costs continue to outpace inflation.
"I think Medicare's on the table," Pelosi said on CNBC. "We have to put it all on the table, see what works."
A failure to raise the debt ceiling would eventually force the United States to default on obligations -- whether payments to Social Security retirees or interest on the debt. That could push the country back into recession and cause trouble for economies and markets across the globe.
So far, markets were little bothered by the United States' public finances. The benchmark 10-year Treasury bond yielded 3.15 percent in midday trading, well below its historical average, as investors continued to view U.S. debt as a safe haven in an uncertain economic environment.
A top bond manager said it would be foolish for investors to bet against a debt-limit increase.
Rick Rieder, a top bond trader at BlackRock, said the market expects that Washington will ultimately strike a deal that will allow a debt-ceiling increase.
Still, concern about the country's fiscal situation may be prompting foreign investors to shift their purchases toward shorter-dated assets, which carry less risk, according to Treasury data.
Lawmakers are eager to show voters they can rein in a debt load that has more than doubled in the past 10 years due to wars, tax cuts and the deepest recession since the 1930s.
While Republicans and Democrats have found some common ground in budget talks, they remain at loggerheads over the areas that could yield the largest savings. Representative Jim Clyburn, a top Democrat who has participated in the talks, said the two sides have yet to address taxes or Medicare.
Republicans are insisting on spending cuts measuring in trillions, along with an agreement that would hold down spending over the longer term. Democrats say tax increases will have to be part of the solution as well.
"If the Democratic caucus feels that the sacrifice being requested is fair, I think the votes will be there," Clyburn told Reuters.
(Additional reporting by Richard Cowan and Rachelle Younglai in Washington and Karen Brettell and Richard Leong in New York; Editing by Bill Trott)