White House wants business to aid in debt cap fight

By Rachelle Younglai

WASHINGTON (Reuters) - Worried that Congress will not act in time to raise the country's borrowing cap, the Obama administration is enlisting the business community to persuade lawmakers that a default will have dire consequences.

Outgoing White House economic adviser Austan Goolsbee is set to talk to a slew of business representatives this week, according to a person with knowledge of the meeting.

The meeting will mark the second time in less than a month that Goolsbee has tried to get businesses to ratchet up the pressure on Congress to raise the nation's $14.3 trillion debt limit before August 2, when the Treasury says it will no longer be able to pay the government's bills.

"The White House wants the business community to pull its weight," said one person familiar with the administration's thinking who was on Goolsbee's initial conference call on the subject.

There is a "profound misperception" among some lawmakers that a temporary default will not imperil the fragile economy, said the person, who was not authorized to speak on behalf of the administration.

Calls to the White House seeking comment on the effort were not immediately returned.

The flash point for the White House came when famed investor Stanley Druckenmiller said he could tolerate a brief debt default if it forced lawmakers to reach a deal to slash future budget gaps. This year's deficit is projected to hit $1.4 trillion.

The comments from Druckenmiller, a former hedge fund manager and longtime ally of George Soros, appeared to lend credibility to the belief of some Republicans that the administration was fear mongering about the consequences if Congress failed to move quickly to raise the limit on how much the government can borrow.

Less than a week after Druckenmiller told the Wall Street Journal that a default would not be the "catastrophic" event administration officials claimed, the White House called on some of its Democratic friends in corporate America.

"It really scared the administration that a brand name was saying that (default) was not a big deal," said a financial services industry source who also was on the Goolsbee call in May.

During the call with about 60-70 executives from large and small firms across the country from financial services to manufacturing, Goolsbee likened the debt talks and potential market fallout to a smoldering fire pit in Iran and said one could only get so close before his clothes would catch fire.

The message from Goolsbee, according to the participant, was, "We know markets will react negatively, but don't know how close we can get before they start reacting negatively."

The White House economic adviser cited a study by centrist think tank Third Way that said default would drive the country into a second recession -- a statement Treasury Secretary Timothy Geithner would later make in a letter to Congress.

So far, U.S. markets have shown little concern over the budget stalement in Washington with investors apparently confident lawmakers will lift the debt ceiling in time. The yield on the benchmark 10-year Treasury note hovered around 3 percent on Tuesday, indicating strong demand.

Still, the United States' largest foreign creditor, China, warned that U.S. lawmakers contemplating a technical default, or a delay in interest payments, are "playing with fire".

UNCONVINCED

Conservative Republicans, who helped shift control of the House of Representatives to their party in elections in November, remain unconvinced that there will be terrible fallout if the August 2 deadline is missed.

"A lot of my supporters, a lot of my friends... are making sure that I know that I can't raise the debt ceiling until there is a good plan moving forward to (curb spending,)" said Representative Stephen Fincher of Tennessee.

Fellow Republican Mike Pompeo said there were bankers in his district in Kansas who were watching the negotiations closely and wanted to make sure Congress "got it right," adding that he was more convinced than ever that raising the debt limit without big spending cuts would be wrong.

Publicly, President Barack Obama and his economic team have been warning lawmakers for months that missing payments on any of the government's obligations could push interest rates sharply higher and throw the economy back into recession. They say Republicans would shoulder the blame if that happened.

Lobbying groups for powerful companies such as JPMorgan Chase, Bank of America and Caterpillar Inc, have tried with little success to persuade lawmakers -- and the public -- that a debt default would be unthinkable.

Republican Representative Nan Hayworth of New York said the majority of her constituents have told her that they would prefer that the debt ceiling not be raised.

"I have assured them that it will be accompanied by substantial measures to stop adding to the debt as fast as possible," she said.

(Additional reporting by Laura MacInnis)