Senate Outlines New Debt Deal Framework

On the heels of foreboding comments from the president about the potential for a debt default if Congress fails to agree on a solution by Thursday, the Senate will come armed with a proposal this afternoon.

Highlighting the uncertainty prevailing in Washington, though, the White House announced a last minute postponement of a 3 p.m. meeting to discuss the plan.

Here’s what Senate aids tell FOX News the potential framework, which is seen a rebuttal to Sen. Susan Collin’s six-month extension on Friday, looks like.

The Senate’s new proposal would increase the debt ceiling until mid-February and also relieve the government from a partial shutdown enacted two weeks ago, until January, though it’s possible it could only be backstopped until December 31, 2013.

According to sources on the Hill, the proposal could still include some health-care provisions still on the table, including a medical device tax repeal and income verifications. Though the effort is driven, in large part by Democrats in the Senate, it could have a potential buy-in from Minority Leader Mitch McConnell and is seen as a way to force the House to act on a debt ceiling measure – essentially re-starting the political ping-pong game that ended two weeks ago in shutdown.

Back to 2012’s Fundamentals

Still, the sequester remains a big sticking point between Republicans and Democrats in the Senate. The debate centers on whether the vast arbitrary spending cuts will remain a part of U.S. fiscal policy going into the new year – the same debate that happened at the end of 2012 about how to fund the government in 2014. This time around, while both sides favor getting rid of the sequester’s cuts completely, they differ on why and how to do it.

On one hand, Democrats favor stopping the sequester from going into effect in 2014 – a move that would restore funding to defense and entitlement programs enacted at the beginning of this year.  On the other hand, Republicans favor a continuation of the sequester into the new year so as to keep bloated government spending at bay.

As it stands, the Senate’s new proposal saves the argument over continuing or repealing the sequester for another day – whereas the Republican proposal from Collins would have kept the sequester a front-and-center issue for the continuing resolution and debt ceiling debates.

The Next Steps

Though Democrats and the president may favor the Senate’s framework, defeat could come easily, and a possible deal could be rewound all the way to square one. That’s because in the Senate, it can take days to move just one piece of legislation, and if just one senator withholds consent to schedule a vote, he or she can force the Senate to spend valuable time garnering procedural approval, which could delay the vote by several days.

Still, despite the looming hurdles the Senate’s proposed framework faces, Senate Majority Leader Harry Reid said, after a “constructive, good faith negotiations” meeting with Senate Minority Leader Mitch McConnell, he is “very optimistic” Congress will reach an agreement on a path forward by this week.

A spokesperson for McConnell’s office said following the meeting, “We’re engaged in good faith negotiations and those talks will continue.”

Despite the president’s earlier comments warning about the threat of default should a deal fail to materialize from these talks, Wall Street took the comments out of Washington as a sign of progress and hope. The Dow Jones Industrial Average rose nearly 50 points after comments from Senators Reid and McConnell.

Wall Street: Anxious, But Not Downright Frightened

Though it seems compromise is hard to come by in Washington, Stephen A. Myrow, managing director at ACG Analytics says there’s still hope.

“It has taken two weeks, but the shutdown has become a battle over the issue that typically causes a shutdown -- spending -- instead of other high-profile, topics such as Obamacare.  Treasury Secretary Jacob Lew's Thursday, October 17th debt limit deadline is finally the action-forcing mechanism that will assure an agreement gets reached, passed and signed into law within the next 96 hours,” Myrow wrote on Monday.

In a note to clients Monday, Goldman Sachs said the easiest thing to get both parties to coalesce around might be a two or three month deal, if a longer-term agreement can’t be reached.

“This would allow congressional leaders to sidestep the sequestration issue in this round of talks, since the cuts do not take effect until around January 15, 2014. In the interim, Congress would then try to replace some of the cuts under sequestration with other sources of budgetary saving spread over ten years,” the investment bank said.

The bank said it still expects a deal to emerge within the next few days, but cautioned a compromise coming after the Oct. 17 drop-dead date issued by Treasury isn’t out of the realm of possibility.

“If a bipartisan deal is reached in the Senate, getting the bill through the House would still be a tricky proposition and Republican leaders may not want to put such a bill to a vote until other options have been exhausted,” the New York-based bank wrote.

It also reiterated the mid-week deadline wouldn’t actually be a date on which the U.S. would begin to default on its obligations. Instead, Goldman said Treasury will have just about $30 billion of cash on hand at that point, which it could use to finance debt for “several more days, and perhaps longer.”

Sharing in the cautious optimism, Wall Street traders, investors, and analysts don’t seem to be too pessimistic about the ongoing lack of progress on Capitol Hill. At the opening bell, U.S. equities sold off – the Dow briefly fell 100 points – before settling out and pairing back losses. That comes on the back of a rally at the end of last week.

Greg Valliere, chief political strategist at the Potomac Research Group, said in a note to clients on Monday, the threat of default dissipated last week and that’s not so much what traders are focused on this week – instead it’s another worry facing Wall Street.

“It's the likelihood that a deal late this week will simply kick the can down the road, setting up still another shutdown crisis later this fall, then another during the winter, then another in the spring.  This will do real damage to the economy -- business and consumer psychology will slump even further amid this persistent and corrosive uncertainty,” he wrote.

Valliere expects a deal to emerge late Wednesday, but warns conservative efforts to reject an unpalatable deal from the Senate at the eleventh hour shouldn’t be underestimated.

While Wall Street remains only somewhat concerned about a debt deal, bond markets remain deeply worried about a possible debt ceiling breach and potential default. Concerned senior Treasury officials met Sunday to discuss market reaction to debt negotiations – or lack thereof. Notably, bond markets were closed Monday for the Columbus Day holiday, so it is difficult to gauge the reaction to inaction this weekend.

Peter Boockvar, chief equity strategist at The Lindsey Group, said Monday most finance ministers at the G-20 meeting over the weekend believe some kind of deal will emerge before the Oct. 17 deadline but still, concerns remain.

“We must watch for the longer term implications on our bond market from the perspective of foreigners who own half our debt. The same level of appetite is unlikely to be there and we’ve already seen early evidence of that in both the weak action in the U.S. dollar and the amount of bonds foreigners have purchased this year,” he wrote.

Citigroup warned forebodingly on Friday that even if a debt deal does come before the borrowing authority lapses, the damage to the U.S. economy could already be done, impacting the Fed’s desire to begin tapering QE3.

And Barclays analysts Koon Chow and Guillermo Felices on Monday affirmed that viewpoint. The investment bank said it foresees the $85-billion-per-month bond-buying program to continue through December, while the more bearish Citi forecast calls for QE through March.

FOX News' Chad Pergram and Kara Rowland contributed to this report from Washington D.C.