Are Debt Talks Progressing?

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A working group led by Vice President Joe Biden is seeking to put together a deal on long-term U.S. budget deficits and end a standoff over raising the limit on government borrowing. After five meetings, some progress has been made but there are still deep disagreements on taxes and healthcare.

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The federal budget deficit is expected to hit $1.4 trillion this year and stay in the trillion-dollar range for several years.

If the Biden group, which includes senior Senate and House of Representatives members, can reach a deal on cutting the deficit, it could give lawmakers political cover to vote in favor of raising the country's $14.3 trillion borrowing cap.

U.S. Treasury Secretary Timothy Geithner has warned that if Congress does not raise the debt limit by Aug. 2, the United States could face a default with dire economic consequences.

ARE DEFICIT TALKS MAKING PROGRESS?

Progress has been made but, as Republicans and Democrats on Biden's seven-member panel have begun tackling the thorniest issues of tax increases and entitlement reform, a deal still seems far from reach.

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After the fourth negotiating session on May 24, Biden said the two sides were aiming to find "well above $1 trillion" in savings over a decade that would represent "a downpayment" on additional deficit reductions. Around $4 trillion in savings is a broad goal -- aimed at showing financial markets that Washington is serious about fixing the fiscal mess. While Biden voiced optimism for a deal, he also warned that revenues would have to be part of the formula.

Two days later, after talks that lasted little more than an hour, negotiators emerged looking downbeat and left with little comment.

Aides said the talks had entered difficult terrain and that a fundamental stumbling block remained: Democrats will not consider cuts to health benefits, such as the Medicare health program for the elderly, until Republicans consider tax increases -- something Republicans insist are "off the table."

The next meeting is scheduled for June 9. The stakes were raised further on June 2 after the ratings agency Moody's warned it would consider cutting the United States's top-notch credit rating if substantial progress towards a debt limit deal had not been made by mid-July.

WHERE ARE THEY LOOKING FOR CUTS?

With little time to craft a deficit-reduction package, the Biden group is trying to identify obvious areas of agreement. Rather than come up with its own plan, the group is looking to "mix and match" from existing plans.

These include President Barack Obama's revised fiscal 2012 budget proposal, the House Republican budget plan, a House Democratic alternative, a report by Obama's deficit-reduction commission and an array of other governmental and non-governmental reports.

Some likely areas of agreement: reduce farm subsidies, require federal workers to contribute more to their pension plans, cap annual spending, sell excess federal property, reduce Medicare fraud and overpayments, and auction broadcast spectrum licenses.

The group has only agreed upon about $150 billion in spending cuts so far, as Republicans demand "trillions" in cuts before they agree to a deal to raise the debt limit.

Participants have begun to worry about the slow progress. On June 3 House Speaker John Boehner accused Obama of having a "hands off approach" and urged the president to get more involved.

Some analysts say a deal will only get done if Obama and Boehner both get involved in talks. The two are scheduled to play golf together on June 18.

 

WHAT HOPES ARE THERE FOR A DEAL?

The greatest hope for a deal lies in the fact the White House and Republican and Democratic leaders all agree that the debt limit needs to be raised by the Aug. 2 deadline.

Exactly how the Biden group gets to a deal remains unclear. Biden himself has said he is not sure if the group can get to the "finish line," but members appear to agree there is not enough time before Aug. 2 to come up with a comprehensive deficit-reduction plan.

Analysts say the only realistic option is to set a deficit-reduction goal of roughly $4 trillion over 10 years, with automatic deficit-cutting "triggers" that would kick in if the deficit were not being reduced fast enough.

Obama advocates that approach but Boehner rejects such "gimmicks."

One of the biggest unresolved questions in the negotiations is whether Republicans would accept revenue increases that are not technically tax increases. More than $1 trillion in revenues can be clawed back by closing loopholes and breaks in the tax code, without having to hike rates. If Republicans agreed in principle to such revenue increases, it could clear the way for a deal.

WILL THE TEA PARTY MOVEMENT BACK A BIDEN DEAL?

Even if the Biden panel reaches a broad deficit deal that avoids, for now, going into detail on taxes and entitlements, it is almost sure to face opposition from dozens of lawmakers aligned with the fiscally conservative Tea Party movement.

Their opposition is bolstered by opinion polls showing most Americans oppose raising the debt limit. Many conservative Republicans do not believe Geithner's Aug. 2 deadline or his predictions of catastrophe if the borrowing cap is not increased.

When Congress eventually votes to raise the debt limit, Boehner likely will need Democratic help to pass it.

 

WHO HAS MORE AT STAKE IN THE TALKS?

There are considerable risks on all sides. If Boehner fails to get a "yes" vote in the House to raise the debt limit, Republicans likely will be blamed for any fallout in the bond markets, and with it a spike in interest rates.

A financial crisis could plunge the United States back into recession. With many Americans already questioning Obama's stewardship of the economy, another downturn would endanger his efforts to seek re-election next year.

ARE THE MARKETS WORRIED?

For now, bond markets are calm. Yields have stayed low, suggesting investors remain comfortable buying U.S debt. Analysts say few investors envisage Congress failing to raise the borrowing cap, even if it takes weeks of negotiations.

Twelve out of 23 Wall Street bond dealers and fund managers surveyed by Reuters in May said the government had until the end of July before the bond market would start to worry. (Editing by Jackie Frank)