(Corrects to show that China is the biggest foreign holder of
U.S. debt in paragraph nine. The error also appeared in previous
* Treasury Secretary Lew: Congress "playing with fire"
* China tells U.S. to take steps to avoid crisis
* Wall Street drops on deadlock
* Benchmark U.S. Treasuries firm
By Richard Cowan
WASHINGTON, Oct 7 As the U.S. government moved
into the second week of a shutdown on Monday with no end in
sight, a deadlocked U.S. Congress also confronted an Oct. 17
deadline to increase the nation's borrowing power or risk
Republican House of Representatives Speaker John Boehner
vowed not to raise the U.S. debt ceiling without a "serious
conversation" about what is driving the debt, while Democrats
said it was irresponsible and reckless to raise the possibility
of a U.S. default.
The last big confrontation over the debt ceiling, in August
2011, ended with an 11th-hour agreement under pressure from
shaken markets and warnings of an economic catastrophe if there
was a default.
A similar last-minute resolution remains a distinct
possibility this time.
Equities investors were unnerved by the apparent hardening
of stances over the weekend. U.S. stocks opened sharply lower on
Monday and European shares fell to a four-month low.
In comments on Sunday television political talk shows,
neither Republicans nor Democrats offered any sign of impending
agreement on either the shutdown or the debt ceiling, and both
blamed the other side for the impasse.
"I'm willing to sit down and have a conversation with the
president," said Boehner, speaking on ABC's "This Week." But,
he added, President Barack Obama's "refusal to negotiate is
putting our country at risk."
On CNN's "State of the Union" program, Treasury Secretary
Jack Lew said: "Congress is playing with fire," adding that
Obama would not negotiate until "Congress does its job" by
reopening the government and raising the debt ceiling.
China, the biggest foreign holder of U.S. Treasuries, urged
Washington to take decisive steps to avoid a crisis and ensure
the safety of Chinese investments.
"The United States is totally clear about China's concerns
about the fiscal cliff," Vice Finance Minister Zhu Guangyao said
in the Chinese government's first public comment on the Oct. 17
"We hope the United States fully understands the lessons of
history," Zhu told reporters in Beijing, referring to the
downgrade of the U.S. credit rating by Standard & Poor's in
China held $1.277 trillion of U.S. Treasuries as of last
July, according to U.S. Treasury data released month.
"Who should be worrying most of a possible U.S. default?"
asked Deutsche Bank analysts. "Looking at the top holders of
U.S. Treasuries, recipients of U.S. social security should be
most concerned, followed by the Fed and then China."
Democratic Senator Charles Schumer, whose constituency
includes Wall Street and New York's financial hub, said Boehner
would be forced to act as the deadline for the nation's debt
ceiling gets closer, calling it "too dangerous" to not raise the
U.S. debt limit and saying any default could lead to an economic
"recession, depression or worse."
"The economy could collapse. Will it? No one's certain, but
there's a high enough chance that no one - no one - should risk
it," Schumer told CNN's "New Day."
SHUTDOWN, DEBT CEILING ISSUES MERGED
The two issues of the Federal government shutdown and the
debt ceiling started out separately in the House but have been
merged by the pressure of time.
Conservative Republicans in the House have resisted funding
the government for the current fiscal year until they extract
concessions from Obama that would delay or defund his signature
healthcare law, which launched Oct. 1.
Many of the conservatives want a similar condition placed on
raising the debt ceiling, but in his list of debt-ceiling
demands Sunday, Boehner did not mention the Affordable Care Act,
commonly known as Obamacare.
"It's time to talk about the spending problem," said
Boehner, including measures to rein in costs of entitlement
programs such as the Social Security retirement system and
Medicare, the government-run health insurance program for
Harry Reid, leader of the Democratic-led Senate, is expected
to decide soon on whether to try to open formal debate on a
"clean" bill, without extraneous issues attached, to raise the
U.S. Treasury's borrowing authority.
Passage of such a measure would require at least six of the
Senate's 46 Republicans to join its 54 Democrats in order to
overcome potential procedural hurdles that opponents of
Obamacare could erect.
According to one Senate Democratic aide, the debt limit hike
might be coupled with a new initiative to reform the U.S. tax
code and achieve long-term savings in Social Security and
Medicare, whose expenses have soared along with the population
Republican lawmakers have floated other ideas, such as a
very short debt limit increase, which would create time for more
negotiations at the expense of further market uncertainty, and
repeal of a medical device tax.
The tax is expected to generate some $30 billion over 10
years to help pay for healthcare insurance subsidies under
Some Democrats favor repealing the tax, but they insist that
replacement revenues be found and repeal be considered only
after the government reopens and the debt limit is raised.
MAJOR PROBLEMS IN HOUSE
Agreement in the Senate would send the tangle of issues back
into the House, where the Republican caucus has adopted a hard
line on both Obamacare and the debt ceiling.
There may be enough votes in the House to pass a clean bill,
according to some analysts. That would require almost all of the
House's 200 Democrats and about 20 of its 232 Republicans to
vote in favor. But taking such a vote would require Boehner to
violate his policy against bringing a vote on any legislation
favored by less than a majority of House Republicans.
Reid spokesman Adam Jentleson issued a statement on Monday
attacking what he called "Boehner's credibility problem,"
including the speaker's assertion that there are not enough
votes in the House to pass a clean bill.
"There is now a consistent pattern of Speaker Boehner saying
things that fly in the face of the facts or stand at odds with
his past actions," Jentleson said. "Americans across the country
are suffering because Speaker Boehner refuses to come to grips
For the moment, neither side is moving toward accommodation,
and the stakes rise with the passage of time.
For any deal to work, negotiators probably would have to
choreograph a multipronged approach that allows all sides to
declare victory, even if it is one that sets up another battle
in mid-November or December.
White House officials were firm on Monday that Obama will
not negotiate under the threat of a default and repeated that it
is up to Congress to raise the U.S. borrowing cap.
While the shutdown itself is unlikely to cause major
disruption in the markets, a fight over the debt ceiling could.
From July 31 thru Aug. 2 during the debt-limit standoff in 2011,
the S&P 500 index lost 3 percent, and the deadlock led to a
downgrade of the U.S. credit rating to AA-plus from AAA by S&P.
The outlooks from Moody's and S&P, the only agency so far to
have lowered its rating on U.S. debt, are both at "stable," but
Fitch Ratings has indicated a negative outlook for the U.S. debt
All three agencies have said the U.S. debt profile has
improved substantially over the past two years, with gross
domestic product growth, while slow, proving to be persistently
positive and the budget deficit trending lower.
Fitch said in a note last week that the U.S. rating is at
risk in the current showdown over the debt ceiling because
failure to raise it sufficiently in advance of the deadline
raises questions about the full faith and credit of the United
States to honor its obligations.
Political gridlock remains the greatest risk to the U.S.
outlook, Fitch said in the note on Oct. 1, the first day of the
partial government shutdown.
"This 'faith' is a key underpinning of the U.S. dollar's
global reserve currency status and reason why the US 'AAA'
rating can tolerate a substantially higher level of public debt
than other 'AAA' sovereigns," Fitch said.
(Additional reporting by Susan Heavey, Thomas Ferraro, Dan
Burns, Ben Blanchard in Beijing and Walker Simon in New York;
Editing by Fred Barbash, Claudia Parsons, Vicki Allen and Bill