Boehner plans to meet today with rank-and-file House Republicans to brief them on the status of the talks. He told reporters he has prepared his membership for a possible compromise with Democrats to raise the debt limit, and that he believes most of the 240 Republicans are prepared accept it.

“We have a responsibility to act,” he said.

No Final Deal
Weeks of negotiations have yielded no final deal to raise the $14.3 trillion borrowing limit before an Aug. 2 deadline. Obama called House Minority Leader Nancy Pelosi, a California Democrat, on July 20 to tell her that he and Boehner were close on the framework, according to a Democratic official who requested anonymity. The official didn't say if the size and timing of potential revenue increases were part of the discussion.

Two congressional officials said the White House told party leaders it was pursuing a deal to cut spending, including on Social Security and Medicare, and a tax overhaul that could raise $1 trillion. That provoked an angry reaction yesterday from Senate Democrats, who said they feared they might be asked to swallow steep reductions in programs and trims to entitlement benefits with no assurance of higher tax revenue.

Senate Majority Leader Harry Reid of Nevada confronted Lew about reports of such a deal at a
closed-door lunch at the Capitol.

Seeking Fairness
“The president always talked about balance, that there had to be some fairness in this, that this can't be all cuts,” Reid told reporters. “There has to be some revenue with the cuts. My caucus agrees with that. I hope the president sticks with that. I'm confident he will.”

Questioned by Reid, Lew told Democrats he isn't aware of any agreement, said independent Senator Joe Lieberman of Connecticut, who caucuses with the Democrats. Still, some Democrats are concerned they are being left out of the deal- making with Boehner, he said.

They “are anxious that the president is negotiating with Speaker Boehner, and that somehow an agreement made there will be forced on the Senate,” Lieberman said.

Key obstacles remained to any deal. The administration and House Republicans are divided over the fate of the tax cuts for top earners that were passed during President George W. Bush's administration, and how much revenue would be raised to trim the long-term federal debt, according to two Democratic officials familiar with the negotiations.

Debt-Reduction Targets
Negotiators are discussing setting debt-reduction targets to be achieved through entitlement changes and a tax overhaul, then enforcing those goals by setting up consequences to be triggered if they aren't reached.

Obama wants those to include a tax increase on higher- income earners in 2013, while Republicans want to roll back portions of the health-care law Obama pushed through over their opposition in 2010, such as scrapping the mandate that every person have insurance or pay a penalty, according to a congressional official familiar with the talks.

Obama wants spending cuts to be gradual, with the fullest effects not felt until 2014 and beyond, to avoid shaking the economic recovery, the officials said, briefing reporters on condition of anonymity to discuss the closed-door talks.

Discretionary Cuts
While discretionary spending cuts could be immediate, changes in the tax code and entitlement programs would be worked out over the next year and wouldn't take effect until 2013, the officials said. That doesn't include a possible extension of the 2-percentage-point cut in the payroll tax that's due to expire at the end of the year, they said.

The two sides also have yet to agree on a way to ensure that deficit-cutting targets are met, the officials said.

They are staking out political territory on the debt issue. The Democratic-led Senate is expected to vote today to kill a Republican proposal that would provide a $2.4 trillion debt- limit boost only in return for spending curbs and a constitutional amendment requiring a balanced budget.

Obama has threatened to veto the measure, which Republicans call the “cut, cap and balance” plan.

“This piece of legislation is about as weak and senseless as anything that has ever come on this Senate floor,” Reid said, calling it “perhaps some of the worst legislation in the history of this country.”

No Secret Meetings
Republicans argued it is the only way to tackle the long-term debt.

“We don't need any more behind-closed-doors, secret meetings where the president's trying to tell America what we believe and what he believes and nothing ever ends up in writing,” said Senator Jim DeMint of South Carolina. “We have a solution. It's the only one that can be passed before the Aug. 2 deadline.”

Hopes were fading that a plan to shave $3.7 trillion off the debt over a decade, presented earlier in the week by a bipartisan group of six senators and embraced by Obama, could hitch a ride on a
debt-ceiling increase. The group hasn't produced details sought by leaders, said two Democratic aides familiar with the deliberations.

Senator Tom Coburn of Oklahoma, a Republican member of the group, said there is “no way” it could be acted on before Aug. 2.

Fallback Plan
Senate leaders have also discussed a fallback plan by Reid and Republican leader Mitch McConnell of Kentucky to give Obama $2.4 trillion in borrowing authority. It could be combined with spending cuts and a committee charged with pushing through longer-term debt reduction in the coming months. That, too, faced mounting obstacles, with 86 House Republicans signing a letter dubbing the measure the “cut, run and hide” plan and vowing to block it.

Standard & Poor's warned there is a 50 percent chance it will lower the U.S. government's AAA credit rating by one or more levels within three months. S&P said yesterday that even if Congress raises the debt limit in time to avert a default it might lower the U.S. sovereign rating to AA+ with a negative outlook if it isn't accompanied by a “credible solution” on the debt level.

A Modest Raise
Such a ratings change, which could come as soon as early August, would “modestly raise” the federal government's borrowing costs, S&P said. If the U.S. defaults on some obligations after Aug. 2, even if it pays bondholders, S&P forecast short-term interest rates would rise by 0.50 percentage points and long-term interest rates by 1 percentage point.

If S&P were to downgrade U.S. debt following a failure to reach a credible deficit reduction agreement, the market reaction would probably be more severe than the ratings service forecasts, said Christian Cooper, head of U.S. dollar derivatives trading in New York at Jefferies Group Inc., one of 20 primary dealers that trades with the Federal Reserve.

Cooper said long-term Treasury yields could rise by as much as 40 to 50 basis points, or 0.40 to 0.50 percentage points. The ramifications in financial markets would be even broader, he said.

“It is an entirely new world that we would be in to even consider a downgrade of U.S. government debt,” Cooper said. “This is something that would fundamentally change the market's perception of not only U.S. government solvency but how risky assets around the world are priced as well.”

Low Yields
Even amid the political debate about the debt in Washington, bond market yields in the U.S. are lower now than when the government was running a budget surplus a decade ago. The yield on the benchmark 10-year note declined two basis points to 3 percent as of 10:46 a.m. in Tokyo, according to Bloomberg Bond Trader prices.

The rate is below the average of 5.48 percent in 1998 through 2001, the last time the U.S. had a budget surplus, according to Bloomberg Bond Trader prices.

Asian stocks rose for a fourth day, while the yen weakened against all its major peers and bond risk fell amid optimism European officials will contain the region's debt crisis.

Bloomberg News

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