Round Six: Debt Talks Continue in D.C.

Top U.S. lawmakers Thursday are expected to discuss one of the biggest hurdles to a debt-reduction deal that would allow the United States to continue borrowing at rock-bottom rates -- taxes.

As Vice President Joe Biden and six lawmakers meet for a sixth round of talks, outside pressure is growing for them to reach an agreement that would let Congress raise the $14.3 trillion debt ceiling before an Aug. 2 deadline.

Though bond markets remain placid, investors are increasingly alarmed that Congress will fail to act before that date, when the Treasury Department has warned it will run out of money to pay the nation's bills.

"I really hope that they would stop playing with fire," Li Daokui, an adviser to China's central bank, told Reuters in Singapore Wednesday. China, the largest foreign creditor to the United States, holds about $1 trillion of the United States' outstanding debt.

Top Republicans have said that any increase in the country's debt ceiling would have to be matched by an equal amount of spending cuts.

Participants in the Biden group say they have made steady progress since talks began early last month, and have conditionally agreed on at least $150 billion in cuts. But that is far short of the more than $2 trillion in deficit reduction needed to ensure that Congress will not have to revisit the debt ceiling issue before the November 2012 elections.

The cuts could be stretched out over a 10-year period to avoid further stressing a shaky economy, though Republicans in the House of Representatives are also pushing to reduce spending in the fiscal year that starts Oct. 1.

One of the Senate's most conservative members, Republican Jerry Moran of Kansas, said he would support phasing in cuts gradually as long as they put the country on a sustainable fiscal course.

"I am much more interested in the path than any number at the moment. I think the world markets desperately need to see that the Congress, the federal government, the administration understand that we have to address the long-term spending path that we're on," Moran told Reuters.

Budget experts say the United States needs to reduce deficits by $4 trillion over the coming decade to ensure its debt remains at a manageable level.

Some worry that the Biden group is not up to the challenge of fixing the country's long-term fiscal problems.

"One of my concerns about the debt ceiling negotiations is that if we kind of limp through the lowest common denominator -- what's the minimal amount to cut to get through a short term extension," said Democratic Senator Mark Warner, who has been working on a long-term deficit-reduction deal with a handful of other senators.


Republicans and Democrats both say that the Biden talks are not moving fast enough, and time is starting to run short.

Moody's credit rating agency warned last week that it could consider cutting the United States' top-notch credit rating if there was no progress by mid-July. Fitch warned Wednesday that the United States probably would not be able to maintain its top rating if it missed even a few bond payments.

The Obama administration could soothe markets by assuring that debt service would remain the Treasury Department's top priority if it can't cover all of its obligations, said Republican Senator Pat Toomey.

"What concerns me is that the administration, which has the sole ability to guarantee that there will be no default on our debt, they nevertheless continue to suggest that there might be," Toomey told Reuters. "That's an implicit threat."

Conscious of the potential for market chaos if there is not a deal soon, both President Barack Obama and House Speaker John Boehner, the top Republican in Congress, have said they would like to get a deal within a month.

In Thursday's session, due to start at 12:30 p.m. EDT

in the Capitol, the group will take a look at tax hikes, said Republican Senator Jon Kyl, one of the negotiators.

Democrats say tax increases must be part of any deficit-reduction plan but Republicans have refused to consider them on the grounds they would hurt job creation.

The group is also are expected to consider capping federal spending as a percentage of the economy. Federal spending is at 24 percent of gross domestic product, and a proposal that would cap it at 18 percent of GDP is gaining traction among key Republicans like Kyl. Liberals say that approach would prevent the government from responding to recessions and emergencies.

Another proposal, which would cap spending at 20.6 percent of GDP, has drawn support of a handful of Senate Democrats as well as some Republicans.