WASHINGTON — With world financial markets watching nervously, top Democrats and Republicans in Congress each scrambled Sunday to put together new proposals to avert a looming government debt default and a potential global financial crisis.
Senate Democratic Leader Harry Reid of Nevada drafted a new plan that would allow a multi-year increase in the nation's debt ceiling, offset by an equal or greater amount of spending cuts spread over the coming decade. Significantly, it would not include tax increases.
House Speaker John Boehner planned to outline a new blueprint on Monday amid warnings from their leader that they must find a solution that can get through the Democratic Senate.
They all failed to meet their own deadline for a bipartisan agreement before markets opened in Asia on Sunday evening U.S. time, the first markets to open since talks broke down at the White House Friday evening.
Financial markets appeared to be watching cautiously, but initial trading made it clear that they were unshaken as yet.
Market jitters are expected to rise each day from now on that the United States government fails to raise its $14.3 trillion legal limit for borrowing before its Aug. 2 deadline. If the ceiling isn't lifted by then, that could force the government to stop paying paychecks or benefit checks -- or to default for the first time in history by failing to pay bond holders debt already owed. That could panic financial markets and kick the weak U.S. economy back into recession.
President Barack Obama was largely a bystander Sunday as leaders of the Democratic-controlled Senate and the Republican-controlled House prepared their own last-ditch proposals.
Sen. Reid, D-Nev., started writing a plan that would increase the debt ceiling by $2.4 trillion -- enough to maintain current government spending through the 2012 elections. Democrats do not want to face the threat of default again before that. Treasury Secretary Tim Geithner said Sunday on ABC's 'This Week' that the cloud of uncertainty over the debt ceiling must be removed decisively from the economy to reassure investors, and that a short-term debt extension would only prolong uncertainty, menacing the economy.
Reid's plan also would call for cuts in spending totaling $2.7 trillion over several years, according to a Democratic official familiar with the proposal. Reid's cuts would exclude Social Security, Medicare and Medicaid — important Democratic priorities, and key to retaining Democratic votes for any such plan.
Reid would not propose tax increases, which Democrats have demanded as a way of making the wealthy share the pain of deficit cuts with the poor and working class who might bare the brunt of federal spending cuts. Reid's omission of tax hikes is an important concession to Republicans and could prove pivotal to getting a final deal.
Reid and Rep. Nancy Pelosi, D-Cal., her party's leader in the House of Representatives, briefed Obama on the plan at the White House Sunday evening. Afterward, Reid was expected to brief his fellow Senate Democrats.
House Speaker Boehner, R-Ohio, appeared ready to urge an increase in the debt ceiling of about $1 trillion - enough to keep the government in operation into next year and avoid default - but small enough to force lifting of the debt ceiling again next year after another round of debate on more spending cuts.
The White House threatened to veto any short-term solution, saying that would keep the threat of default hanging over the economy.
"The president believes that ...we must get this uncertainty out of the system," White House Chief of Staff Bill Daley said on NBC's "Meet the Press."
Treasury Secretary Geithner said markets would react negatively not only to failure to achieve a deal, but to any small, short-term deal that meant another budget fight and threat of default next year.
"We have to take that threat off the table through the election," Geithner said on the Fox News Sunday program.
Financial markets, he said, "are going to look at...not just whether we avoided a default crisis, which I'm very confident we will. They're going to look at whether we lift the cloud of default off the American economy. And they're going to look at the quality of savings and reforms we put in place."
Geithner sidestepped questions about contingency plans for which bills he'd pay and which he'd ignore if the Congress doesn't vote to raise the debt ceiling. Without new authority to borrow, Treasury will collect enough revenue only to cover about 60 percent of monthly bills.
"We write 80 million checks a month. There are millions and millions of Americans who depend on those checks coming on time. Not just people in the military, but people who get Social Security benefits, Medicare, Medicaid benefits....Congress will be putting 80 million check payments at risk."
In a 40-minute conference call with House Republicans Sunday afternoon, Boehner pressed his colleagues to compromise enough to get legislation that could pass the Democratic-controlled Senate.
Otherwise, he warned, Obama might be able to use the threat of default to get what he wants - a $2.4 trillion increase in the debt ceiling - enough to maintain current government spending through the 2012 election - without any real guarantee of equal or greater spending cuts later.
"To stop him, we need a vehicle that can pass in both houses," Boehner said, according to a partial text released by his office. "What can we pass that will protect our country from what the president is trying to orchestrate?
"...The path forward, I believe, is that we pull together as a team behind a new measure that has a shot at getting to the president's desk," he said. "I do think there is a path. But it's gonna require us to stand together as a team. It's gonna require some of you to make some sacrifices."
He added: "No one is willing to default on the full faith and credit of the United States."
From Texas, one House Republican said he and others are mindful of the threat of default.
"We're all concerned about it," said Rep. Michael Burgess, R-Texas. "The feedback we're getting from constituents was that they want to see it fixed, but they want to see it fixed the right way."
(Maria Recio contributed to this report.)
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