U.S. RATING DOWNGRADE: Stocks on key Asian exchanges dropped early Monday on what is likely to be an eventful day in world markets

Asian stocks dip after U.S. credit downgradeBy the CNN Wire StaffAugust 7, 2011 9:47 p.m. EDT




Asia markets open after U.S. downgradeSTORY HIGHLIGHTS

NEW: Losses are modest in Tokyo, Seoul and Sydney

Investors are weighing both the downgrade and the European debt crisis

G-7 leaders say they are committed to taking "all necessary measures"

U.S. stock futures tumble around 1.5% in early electronic trading

Stocks on key Asian exchanges dropped early Monday on what is likely to be an eventful day in world markets, following Standard and Poor's downgrade of U.S. debt.

In the first hour of Tokyo trading, the Nikkei index fell 112 points, or 1.2%.

Korea's KOSPI index slipped 1.2%. In Australia, the All Ordinaries index lost 1.1%.

Similarly, U.S. stock futures tumbled around 1.5% in early electronic trading Sunday.

Australian markets lower at open

Markets react to ratings cuts in the U.S.

 Standard & Poor's and Financial Markets

The futures were the first gauge of investor sentiment following Friday night's downgrade, removing the United States' AAA status for the first time. They give an indication of how investors will react when regular-hours U.S. trading begins at 9:30 a.m. ET Monday.

Besides the U.S. downgrade, investors are worried about the debt crisis in some European nations.

Sunday evening, financial representatives of leading industrial nations said that they are committed to taking "all necessary measures to support financial stability and growth in a spirit of close cooperation and confidence."

They welcomed the "decisive actions taken in the US and Europe" and "the additional policy measures announced by Italy and Spain to strengthen fiscal discipline and underpin the recovery in economic activity and job creation."

"We are committed to taking coordinated action where needed, to ensuring liquidity, and to supporting financial market functioning, financial stability and economic growth," G-7 finance ministers and central bank governors said in a statement.

Treasury Secretary Tim Geithner had been expected to take part in a conference call with representatives of the other G-7 nations to discuss the downgraded U.S. credit rating, a G-7 official told CNN.

The G-7 nations are the United Kingdom, France, Germany, Italy, Japan, Canada and the United States.

Middle Eastern markets, the first to open since the downgrade, were sharply lower on Sunday. Israel's market temporarily halted trading at one point and finished down more than 6%, while the Dubai Financial Market General Index fell 3.7%.

The General Index on the Abu Dhabi Securities Exchange was down more than 2.5%, while in Saudi Arabia, the Tadawul All-Share Index dropped nearly 5.5% in trading Saturday.

Forbes: S&P downgrade is 'outrageous'

Why not to panic after S&P downgrade U.S. officials are talking to a "wide range of investors" about the downgrade by the credit agency to try to "mitigate" any short-term negative impact from Friday's announcement, a Treasury official told.

Top Standard & Poor's officials said Sunday that the downgraded credit rating for the United States was both a call for political consensus on significant deficit reduction and a warning of possible further credit problems down the road.

"We have a negative outlook on the rating and that means that we think the risks currently on the rating are to the downside," said David Beers, the S&P global head of sovereign ratings, on "Fox News Sunday."

However, Beers said markets were reacting to the debt crises in some European countries and fears of a global economic slump, rather than the U.S. credit downgrade alone.

The European Central Bank, in a bid to calm markets, said on Sunday it would implement a bond-purchase program and welcomed the announcements by Italy and Spain on new measures meant to reduce their deficits. It told the governments of those countries that a "decisive and swift implementation" of reforms is "essential."

The move represents an escalation in the official response to Europe's debt crisis, which is now more than a year old and until recently was contained to smaller economies like Greece, Ireland and Portugal.

John Chambers, the S&P head of sovereign ratings, told ABC's "This Week" program Saturday that it could take years for the United States to return to AAA status.

"Well, if history is a guide, it could take a while," Chambers said. "We've had five governments that lost their AAA that got it back. The amount of time that it took for those five range from nine years to 18 years, so it takes a while."

The agency's concerns "are centered on the political side and on the fiscal side," Chambers said.

"So it would take a stabilization of the debt as a share of the economy and eventual decline," he said. "And it would take, I think, more ability to reach consensus in Washington than what we're observing now."

Both Beers and Bill Miller, chairman and chief investment officer at Legg Mason Capital Management, told the Fox program that they don't expect the U.S. downgrade to cause a spike in interest rates, one of the possible results of the higher risk now attached to U.S. debt.

"I don't think we'll pay more in interest," Miller said, calling the downgrade more of a symbolic event than an economic event. However, he warned of continuing market volatility in coming days driven by uncertainty.

Rating agencies such as S&P, Moody's and Fitch analyze risk and give debt a grade that is supposed to reflect the borrower's ability to repay its loans. The safest bets are stamped AAA. That's where the U.S. debt has stood for years.

Moody's first assigned the United States an AAA rating in 1917. Fitch and Moody's, the other two main credit ratings agencies, maintained the AAA rating for the United States after last week's debt deal, though Moody's lowered its outlook on U.S. debt to "negative."

A negative outlook indicates the possibility that Moody's could downgrade the country's sovereign credit rating within a year or two.

U.S. Treasury officials received S&P's analysis Friday afternoon and alerted the agency to an error that inflated U.S. deficits by $2 trillion, said an administration official, who was not authorized to speak for attribution. The agency acknowledged the mistake, but said it was sticking with its decision.

The administration official called it "a facts-be-damned decision ... Their analysis was way off, but they wouldn't budge."

Saturday, Gene Sperling, director of Obama's National Economic Council, criticized S&P's call.

"The magnitude of their error and the amateurism it displayed, combined with their willingness to simply change on the spot their lead rationale in their press release once the error was pointed out, was breathtaking. It smacked of an institution starting with a conclusion and shaping any arguments to fit it," he said.

But Beers defended his agency's move on Sunday, telling the Fox program: "The underlying debt burden of the U.S. government is rising and will continue to rise over the next decade."

European finance officials are stepping up their efforts to slow the rising panic over the euro zone's debt crisis.


The European Central Bank signaled in a statement on Sunday that it was ready to begin buying Italian and Spanish government bonds.

Both countries -- two of the largest economies in Europe -- have been under pressure to speed up budget reforms as investors have demanded higher interest rates for loans.

The move represents an escalation in the official response to Europe's debt crisis, which is now more than a year old and until recently was contained to smaller economies like Greece, Ireland and Portugal.

In a separate announcement Sunday, finance ministers from the G-7 -- a group of significant world economies -- pledged support for troubled countries.

"In the face of renewed strains on financial markets, we ... affirm our commitment to take all necessary measures to support financial stability and growth in a spirit of close cooperation and confidence," the G-7 statement read.

The world's largest economies -- and fastest growing

Investors lending money to Italy and Spain have been demanding higher interest rates, now north of 5.5%, while Greek bonds carry a 15% rate. (More on what's wrong with Italy)

Coupled with weak growth, the sharp increase in interest rates only adds to the countries' debt and makes it even more difficult for them to dig out of their holes.

The high government debt loads threaten to trap countries in a vicious cycle: The debt weighs on economic growth -- and austerity measures aimed at attacking the debt only put a further drag on their economies.

In recent days, European leaders have been scrambling to figure out solutions.

Details of the ECB plans to buy Italian and Spanish bonds were not immediately clear.

But analysts at Barclays Capital Research said the move, coming in addition to efforts the countries are making to get their budgets in better shape, should help calm markets.

"It carries the clear hint that the ECB is ready to purchase debt on its own book if needed, should it consider markets dysfunctional and so interfering with monetary policy transmission," Barclays analysts wrote in a note Sunday.

Market correction looks bearish

Europe has been criticized as slow to respond to its debt crisis.

Last month, leaders agreed to a new 109 billion euro aid package for Greece and proposed an expansion of the European Financial Stability Fund -- a controversial bailout program established last year.

The stability fund's powers, which has so far disbursed money to Ireland and Portugal, will be greatly expanded under the new plan.

The 440 billion euro fund will have the authority to buy sovereign debt in the secondary market, meaning it could absorb discounted government bonds from banks and investors.

It will also be able to provide lines of credit to shore up banks in troubled euro zone nations, even ones that do not have currently get help from the program, such as Italy and Spain.

But the stability fund's expansion has yet to be completed.

In its statement on Sunday, the ECB said that "governments stand ready" to activate the fund "once [it] is operational."

Deuda de EEUU: Senado rechaza plan de Reid y nueva votación se aplazaría para el lunes

EEUU: Senado rechaza plan de Reid y nueva votación se aplazaría para el lunes

Reid no pudo sumar los 60 votos necesarios para hacer avanzar su propuesta, pero se estima que el plan será objeto de nuevas negociaciones con los republicanos que deriven en una posible votación mañana.

El Senado de Estados Unidos rechazó hoy el proyecto de reducción del déficit presentado por el jefe de la bancada demócrata en la cámara alta, Harry Reid, y se abrió así un nuevo compás de espera con negociaciones alrededor de ese mismo plan, y que pueden concluir con un acuerdo para elevar el techo del endeudamiento y evitar un default.

Reid no pudo sumar los 60 votos necesarios para hacer avanzar su propuesta, pero se estima que el plan será objeto de nuevas negociaciones con los republicanos que deriven en una posible votación mañana a las 7 (12GMT).

En una votación de 50 contra 49, el plan del líder de la mayoría del Senado, el demócrata Harry Reid, quedó a pocos votos de los 60 necesarios para avanzar en el organismo de 100 miembros.

En el campo de los republicanos, el presidente de la Cámara de Representantes, John Boehner, envió un correo electrónico sobre la deuda a sus colegas el domingo, indicando que las "conversaciones avanzan en la dirección adecuada, pero quedan asuntos mayores" pendientes.

Por su parte, La Casa Blanca permanece abierta a elevar el límite de deuda de Estados Unidos por unos días adicionales si los legisladores alcanzan un acuerdo y requieren de más tiempo para conseguir su aprobación en el Congreso, afirmó el domingo un funcionario.

Los republicanos y los aliados demócratas del presidente Barack Obama están negociando un pacto para elevar el techo de deuda de 14,3 billones de dólares antes del martes y evitar un moratoria de pagos, pero el tiempo se está agotando.

Incluso con un acuerdo a la mano, tomaría días superar los procedimientos legislativos y llevar el proyecto de ley hasta el despacho de Obama para que lo promulgue.

Republicans blocked a Democratic effort to end debate on Sen. Harry Reid's proposal and move to a vote.

Washington .- Democrats and Republicans are "very close" to reaching a $3 trillion deal that would avoid a possible government default in coming days, Senate Minority Leader Mitch McConnell told CNN's "State of the Union" Sunday.


"We had a very good day yesterday," the Kentucky Republican said, adding that the two sides "made dramatic progress" in negotiations on a deal that would cut government spending and raise the federal debt ceiling.

Another Republican senator, Johnny Isakson of Georgia, later told reporters he expected a Monday vote on a compromise.

"It feels like they're going to finish the deal today and then we'll have the vote tomorrow," Isakson said, adding he supports the plan under discussion.

Sen. Schumer: Still no deal

Reid, McConnell spar over debt progress

Debt ceiling crisis continues

Pelosi: GOP bill 'perfectly absurd' House Speaker John Boehner, meanwhile, advised his Republican caucus that serious issues remain under discussion, but to be ready for a possible conference call on Sunday to discuss a proposed deal.

Democrats in Congress and the Obama administration agreed that progress has been made, but noted negotiations continue on difficult issues.

Senate Majority Leader Harry Reid, D-Nevada, opened the Senate session Sunday by saying there was no agreement yet on raising the federal debt ceiling, but "we are cautiously optimistic."

"If there's a word right here that would sum up the mood, it would be relief -- relief that we won't default," Sen. Chuck Schumer, D-New York, said on the CNN program. "That's not a certainty, but default is far less of a possibility now than it was even a day ago."

With the deadline to reach a debt ceiling agreement just two days away, congressional leaders and the White House are trying to complete the possible deal that would extend the debt limit through 2012 -- a presidential election year.

If Congress fails to raise the current $14.3 trillion debt ceiling by Tuesday, Americans could face rising interest rates and a declining dollar, among other problems.

Some financial experts have warned of a downgrade of America's triple-A credit rating and a potential stock market plunge. The Dow Jones Industrial Average dropped for a sixth straight day on Friday.

Without an increase in the debt limit, the federal government will not be able to pay all its bills next month. President Barack Obama recently indicated he can't guarantee Social Security checks will be mailed out on time.

In Afghanistan on Sunday, Joint Chiefs of Staff Chairman Adm. Mike Mullen was unable to assure U.S. troops they would get their paychecks following the August 2 deadline without a deal. Mullen said August 15 would be the first payday jeopardized if the United States defaults.

Last week, a Department of Defense official told on condition of not being identified that "it's not a question of whether, but when" military pay gets withheld if no agreement is reached.

Vice President Joe Biden arrived at the White House on Sunday morning, though no additional formal talks involving the administration and congressional leaders have been announced. A Democratic source told on condition of not being identified that Biden was engaged in behind-the-scenes negotiations with both congressional legislators and the administration.

Initial news of a possible deal came shortly after the Senate delayed consideration of a debt ceiling proposal by Reid late Saturday night, pushing back a key procedural vote by 12 hours. When that vote occurred on Sunday afternoon, Republicans blocked a Democratic effort to end debate on the Reid proposal and move to a vote, extending consideration of the plan while negotiations continue.

The vote was 50-49, short of the super-majority of 60 required to pass.

Reid plans to insert a negotiated final agreement into the proposal once a deal has been reached. When it became clear that Democrats would lose Sunday's vote, Reid voted against his own plan in a procedural move to preserve the ability to bring it up again.

According to McConnell and other congressional and administration officials interviewed Sunday, as well as various sources who spoke on condition of not being identified, the deal under discussion would be a two-step process intended to bring as much as $3 trillion in deficit reduction over 10 years.

Some sources provided differing targets for the total, ranging from $2.4 trillion up to $3 trillion.

A first step would include about $1 trillion in spending cuts while raising the debt ceiling about the same amount. The proposal also would set up a special committee of Democratic and Republican legislators from both chambers of Congress to recommend additional deficit reduction steps -- including tax reform as well as reforms to popular entitlement programs such as Medicare and Social Security.

The committee's recommendations would be put to a vote by Congress, without any amendments, by the end of the year. If Congress fails to pass the package, a so-called "trigger" mechanism would enact automatic spending cuts. Either way -- with the package passed by Congress or the trigger of automatic cuts -- a second increase in the debt ceiling would occur, but with an accompanying congressional vote of disapproval.

In addition, the agreement would require both chambers of Congress to vote on a balanced budget amendment to the U.S. Constitution. Such an amendment would require two-thirds majorities in both chambers to pass, followed by ratification by 38 states -- a process likely to take years.

Schumer told that a main sticking point still under discussion was the trigger mechanism of automatic spending cuts in case Congress fails to enact the special committee's recommendations.

According to sources, cuts in the trigger mechanism would be across-the-board, including Medicare and defense spending, to present an unpalatable alternative for both parties in the event Congress fails to pass the special committee's proposal.

"You want to make it hard for them just to walk away and wash their hands," Gene Sperling, the director of Obama's National Economic Council, told. "You want them to say, if nothing happens, there will be a very tough degree of pain that will take place."

Preliminary reaction showed sensitivity to that pain. Sen. Carl Levin, D-Michigan, said the automatic spending cuts under a trigger mechanism should not affect Medicare benefits for senior citizens.

GOP leader 'confident' debt deal on horizon

Worried about debt ceiling

Sen. Hutchison speaks about debt crisis

Tea Party view of debt ceiling fight

National Debt

U.S. House of Representatives

U.S. Senate

Harry Reid

John Boehner

"The way we understand it's going to be worded is it does not affect beneficiaries. It would affect providers and insurance companies," Levin said. "That should be the case, because if it hits beneficiaries, you're going to lose lots of Democratic votes."

Meanwhile, former U.S. ambassador to the United Nations John Bolton, an aide to former Republican President George W. Bush, warned that automatic spending cuts for the military under the trigger would put national security at risk.

"By exposing critical defense programs to disproportionate cuts as part of the 'trigger mechanism,' there is a clear risk that key defense programs will be hollowed out," Bolton said in a statement.

Overall, the agreement under discussion would increase the debt limit in two stages, both of which would occur automatically -- a key Democratic demand that would prevent a repeat of the current crisis before the next election.

McConnell, who appears to have become the lead Republican negotiator, said he is "very, very close to being able ... to recommend to my members that this is something that they ought to support."

The deal will not include tax increases, McConnell added, expressing a key demand of Republicans. Obama has pushed for a comprehensive approach that would include additional tax revenue as well as spending cuts and entitlement reforms to reduce budget deficits.

Reid, D-Nevada, said Saturday night that the delay in considering his proposal was additional time for negotiations at the White House.

His announcement capped a day of sharp partisan voting in the House and extended talks behind closed doors between congressional and administration officials. Concern continued to grow that Congress will fail to raise the nation's debt ceiling in time to avoid a potentially devastating national default this week.

Earlier Saturday, the Republican-controlled House rejected Reid's plan -- partisan payback for the Democratic-controlled Senate's rejection of Boehner's plan Friday night.

House members rejected Reid's plan in a 246-173 vote. Most Democrats supported the measure; every Republican voted against it.

For their part, Republicans continued to trumpet Boehner's proposal. The measure won House approval Friday, but only by a narrow margin after a one-day delay during which the speaker was forced to round up support from wary tea party conservatives.

Boehner's deal with conservatives -- which added a provision requiring congressional approval of a balanced budget amendment in order to raise the debt limit next year -- was sharply criticized by Democrats, who called it a political nonstarter.

Democratic leaders vehemently object not only to the balanced budget amendment, but also the GOP's insistence that a second debt ceiling vote be held before the next election. They argue that reaching bipartisan agreement on another debt ceiling hike during an election year could be nearly impossible, and that short-term extensions of the limit could further destabilize the economy.

Leaders of both parties now agree that any deal to raise the debt ceiling should include long-term spending reductions to help control spiraling deficits. But they have differed on both the timetable and requirements tied to certain cuts.

Boehner's plan proposed generating a total of $917 billion in savings while initially raising the debt ceiling by $900 billion. The speaker has pledged to match any debt ceiling hike with dollar-for-dollar spending cuts.

His plan would require a second vote by Congress to raise the debt ceiling by a combined $2.5 trillion -- enough to last through the end of 2012. It would create a special congressional committee to recommend additional savings of $1.6 trillion or more.

Any failure on the part of Congress to enact mandated spending reductions or abide by new spending caps would trigger automatic across-the-board budget cuts.

The plan also calls for congressional passage of a balanced budget amendment before the second vote to raise the debt ceiling.

Reid's plan, meanwhile, would reduce deficits over the next decade by $2.4 trillion and raise the debt ceiling by a similar amount. It includes $1 trillion in savings based on the planned U.S. withdrawals from military engagements in Afghanistan and Iraq.

Reid's plan also would establish a congressional committee made up of 12 House and Senate members to consider additional options for debt reduction. The committee's proposals would be guaranteed by a Senate vote with no amendments by the end of the year.

In addition, it incorporates a process based on a proposal by McConnell that would give Obama the authority to raise the debt ceiling in two steps while providing Congress the opportunity to vote its disapproval.

Among other things, Reid has stressed that his plan meets the key GOP demand for no additional taxes. Boehner, however, argued last week that Reid's plan fails to tackle popular entitlement programs such as Medicare, which are among the biggest drivers of the debt.

A recent CNN/ORC International Poll reveals a growing public exasperation and demand for compromise. Sixty-four percent of respondents to a July 18-20 survey preferred a deal with a mix of spending cuts and tax increases. Only 34% preferred a debt reduction plan based solely on spending reductions.

According to the poll, the public is sharply divided along partisan lines; Democrats and independents are open to a number of different approaches because they think a failure to raise the debt ceiling would cause a major crisis for the country. Republicans, however, draw the line at tax increases, and a narrow majority of them oppose raising the debt ceiling under any circumstances.

 

U.S. DEBT TALKS DEADLINE: Boehner vs. Reid bills: Where they meet

NEW YORK.- There certainly are some big differences between the debt-ceiling bill proposed by House Speaker John Boehner and the one proposed by Senate Majority Leader Harry Reid.

But there is also more than $900 billion's worth of compromise between the two.

Both bills call for caps on discretionary spending -- that's the money Washington uses to pay for defense and all manner of government agencies and programs.

Excluding spending on the wars in Iraq and Afghanistan, the Boehner bill would reduce overall spending by $917 billion over 10 years, according to Congressional Budget Office estimates. Similarly, Reid's bill would cut spending by $927 billion.

Breaking those estimates down further, Boehner's bill would cut discretionary spending by $756 billion and save $156 billion in interest costs on the debt. The comparable numbers for Reid's bill are $752 billion and $153 billion.

Both bills also ignore the hot-potato issues of tax and entitlement reform.

So why can't these two bills get along?

There are some major sticking points.

Boehner's plan: The House bill would call for a two-stage increase in the debt ceiling. The first would be worth $900 billion, which might cover the Treasury Department's borrowing needs into early 2012.

But the House bill would set two high hurdles that would have to be cleared before increasing the debt ceiling by another $1.6 trillion -- which could cover borrowing needs past the presidential elections into 2013 .

Spending cuts to whack economy?

First, Congress would have to approve $1.8 trillion worth of debt-reduction proposals by the end of this year. Those proposals would be made by a joint committee the bill would create and no amendments would be permitted.

In addition, to secure the second debt ceiling increase Congress would have to enact a balanced budget amendment by a two-thirds vote in the House and Senate, which is very difficult to secure.

Overall, Boehner's bill would increase the debt ceiling by a total of $2.5 trillion in exchange for $2.7 trillion in debt reduction.

Reid's plan: By contrast, Reid's bill as amended would set a procedure to raise the debt ceiling by $416 right away and two more times after that for a total debt ceiling increase of $2.4 trillion, in exchange for $2.2 trillion in debt reduction.

Reid's cuts count roughly $1.3 trillion in war savings in Iraq and Afghanistan, including debt service costs. But those savings can only be claimed if one assumes that U.S. engagement in Iraq and Afghanistan will continue at full throttle for the next decade, which is not realistic.

Like Boehner's bill, Reid's legislation would create a joint committee but it would be charged with proposing ways to reduce annual deficits to 3% or less of gross domestic product. And while the Senate would have to vote on those proposals without amendment, there is no requirement the proposals be enacted.
The House approved the Boehner bill on Friday evening in a 218-210 vote; 22 Republicans voted against it and no Democrats voted for it. But the Senate then promptly voted to table it. That was expected, since 53 senators on Thursday said that if presented with the Boehner bill they would vote against it.

It's also not at all clear that Reid's plan will pass the Senate, which is scheduled to vote on it at 1 am Sunday.

Presuming both measures fail to generate sufficient support in one or both chambers, lawmakers will have to get serious about striking a real compromise between the parties and the two chambers.

At the rate they're going they may have mere hours to do so before the government's borrowing authority is fully exhausted on Tuesday

Senate Democrats block Boehner debt ceiling plan after House approval
 
House Speaker John Boehner's plan to raise the nation's debt ceiling and slash government spending narrowly passed his chamber on Friday and then was blocked by Senate Democrats, setting up a weekend of negotiations to seek a deal that would avoid a potential federal default next week.


The Senate vote was 59-41 to table the measure, which effectively kills it unless Democrats decide to bring it up again.

Earlier, Boehner's proposal was approved by the House in a sharply polarized 218-210 vote that was delayed by a day while the speaker rounded up support from wary tea party conservatives. No Democrats supported the measure, and 22 of the 240 members of the Republican majority also opposed it.

Even though it was blocked in the Senate, the Boehner plan now is the Republican negotiating position for hammering out a deal with congressional Democrats and President Barack Obama to avert a possible government default next week.

Boehner to Dems: Put something on table

Obama: 'Power is in our hands'

In debt fight, what's the next move?

Who's to blame for debt ceiling debacle?
National Debt

John Boehner

U.S. House of Representatives

However, no face-to-face talks were scheduled, with Democrats accusing Senate Republican Leader Mitch McConnell of refusing to negotiate and McConnell in turn seeking a chance for his caucus to reject a proposal offered by Senate Democratic Leader Harry Reid as a vehicle for compromise.

Democratic and Republican sources familiar with the situation told CNN that McConnell insists the White House be present in further negotiations toward a debt ceiling deal.

In a continuation of the political theater that has characterized the negotiations so far, the House scheduled a vote on the Reid plan for Saturday -- before the Senate will even begin considering it -- as what appeared to be payback for the rejection by Senate Democrats of the Boehner proposal.

Reid, meanwhile, said the Senate will likely vote to take up his plan at 1 a.m. Sunday ET as part of the procedural path required to get something passed in coming days.

As the political maneuvering continues, the clock continues to tick down. If Congress fails to raise the current $14.3 trillion debt ceiling by August 2, Americans could face rising interest rates and a declining dollar, among other problems.

Some financial experts have warned of a downgrade of America's triple-A credit rating and a potential stock market plunge. The Dow Jones Industrial Average dropped for a sixth straight day on Friday.

Without an increase in the debt limit, the federal government will not be able to pay all its bills next month. Obama recently indicated he can't guarantee Social Security checks will be mailed out on time.

Defense Secretary Leon Panetta issued a statement Friday to remind military personnel that they should plan to come to work next week as scheduled, regardless of whether a deal gets worked out. Panetta pledged to do "everything possible to ensure that our national defense is protected."

A Department of Defense official told on condition of not being identified that on the possibility of military pay being withheld, "it's not a question of whether, but when, if an agreement isn't reached."

Friday's House vote was a critical test of Boehner's control over his tea party-infused GOP caucus. The speaker was forced to quell a right-wing revolt over the measure after a number of members complained that it doesn't do enough to shrink the size of government and stem the tide of Washington's red ink.

Boehner, R-Ohio, managed to sway several of those members by including a provision requiring congressional passage of a balanced budget amendment to the Constitution before the debt ceiling can be extended through the end of 2012.

In his floor speech before the vote, Boehner called the proposal imperfect but necessary, and he criticized Obama and congressional Democrats for rejecting all deficit reduction measures passed by the House so far.

House passes Boehner debt plan

Senate moderates unhappy with choices

Obama's options - if there is no deal

John McCain taking on the tea party? "We've tried to do our level best ... but some people continue to say no," Boehner said, adding: "I stuck my neck out a mile to try to get an agreement with the president of the United States."

His voice rising to a shout, Boehner continued to cheers and applause from fellow Republicans: "It is time for this administration and the other party across the aisle -- put something on the table. Tell us where you are."

Democratic leaders vehemently object both to the balanced budget amendment and the requirement of a second debt ceiling vote before the next election. They argue that reaching bipartisan agreement on another debt ceiling hike during an election year could be nearly impossible, and that short-term extensions of the limit could further destabilize the economy.

Earlier in the day, Obama urged Senate Democrats and Republicans to take the lead in the congressional deliberations.

Boehner's plan "has no chance of becoming law," Obama said. "The time for putting party first is over. The time for compromise on behalf of the American people is now. ... It's important for everybody to step up and show the leadership that the American people expect."

"This is not a situation where the two parties are miles apart," the president insisted. But "we are almost out of time."

Obama urged Americans to contact their members of Congress "to keep the pressure on Washington." Phone lines on Capitol Hill were jammed Friday as people from coast to coast tried to weigh in on the debate.

Meanwhile, Reid, D-Nevada, has been pushing his own plan to raise the debt limit, though he will need to win over at least seven Senate Republicans to win the 60 votes necessary to overcome a certain filibuster.

Reid announced Friday morning that he intended to "take action" on a Senate bill by the end of the day. Later, he complained on the Senate floor that Republicans would effectively filibuster his proposal by requiring a 60-vote super-majority in the 100-member chamber to support the start of debate on it. It was unclear when Reid would attempt to hold that vote, and he warned it could as late as 1 a.m. ET Sunday.

Reid also blasted Boehner's decision to include a mandatory balanced budget amendment provision in the GOP plan, calling the addition of "even more stuff in this right-wing leaning bill. ... It's really hard to comprehend."

Sen. Chuck Schumer, D-New York, accused Boehner of "adding all kinds of unrealistic poison pills to his plan."

But McConnell, R-Kentucky, argued Senate Democrats were doing little to actually resolve the crisis.

"I would suggest to my friends on the other side ... that they start taking their responsibilities as a majority party a little more seriously, because at this point, the only people who are disregarding the consequences of default are Senate Democrats -- not the Republicans in the House -- but them," McConnell said. In a statement after the House vote, McConnell said: "I eagerly await the majority leader's plan for preventing this crisis."

Leaders of both parties now agree that any deal to raise the debt ceiling should include long-term spending reductions to help control spiraling deficits. But they differ sharply on both the nature and timetable of the cuts.

Despite the strong partisan rhetoric, there have been signs of a growing recognition of a need for further compromise. Earlier this week, McConnell called for renewed negotiations with Obama, and indicated that his party must be willing to move away from some of its demands.

Sources close to the negotiations have also told that Vice President Joe Biden is very much in the mix of back-channel conversations on a possible fallback position.

White House Chief of Staff Bill Daley told Thursday that, presuming the Boehner plan wins House approval and gets blocked in the Senate, the next step is for everyone "to take a step back in the Congress and look at where is a point of compromise."

Daley said that similarities between the Boehner and Reid plans "may be the grounds for a deal that, hopefully, both parties can pass."

Both plans suffered setbacks earlier this week when the nonpartisan Congressional Budget Office released reports concluding that they fell short of their stated deficit reduction goals.

Boehner's plan, which has since been revised, proposed generating a total of $917 billion in savings while initially raising the debt ceiling by $900 billion. The speaker has pledged to match any debt ceiling hike with dollar-for-dollar spending cuts.

His plan, however, would require a second vote by Congress to raise the debt ceiling by a combined $2.5 trillion -- enough to last through the end of 2012. It would create a special congressional committee to recommend additional savings of $1.6 trillion or more.

Any failure on the part of Congress to enact mandated spending reductions or abide by new spending caps would trigger automatic across-the-board budget cuts.

The plan, as amended Friday, also calls for congressional passage of a balanced budget amendment to the Constitution before the second vote to raise the debt ceiling, which would likely be required at some point during the winter.

As for Reid's plan, a revised version he proposed Friday would reduce deficits over the next decade by $2.4 trillion and raise the debt ceiling by a similar amount. It includes $1 trillion in savings based on the planned U.S. withdrawals from military engagements in Afghanistan and Iraq.

Reid's plan also would establish a congressional committee made up of 12 House and Senate members to consider additional options for debt reduction. The committee's proposals would be guaranteed by a Senate vote with no amendments by the end of the year.

In addition, it incorporates a process based on proposal by McConnell that would give Obama the authority to raise the debt ceiling in two steps while providing Congress the opportunity to vote its disapproval.

Among other things, Reid has stressed that his plan meets the key GOP demand for no additional taxes. Boehner, however, argued this week that Reid's plan fails to tackle popular entitlement programs such as Medicare, which are among the biggest drivers of the debt.

A recent CNN/ORC International Poll reveals a growing public exasperation and demand for compromise. Sixty-four percent of respondents to a July 18-20 survey preferred a deal with a mix of spending cuts and tax increases. Only 34% preferred a debt reduction plan based solely on spending reductions.

According to the poll, the public is sharply divided along partisan lines; Democrats and independents are open to a number of different approaches because they think a failure to raise the debt ceiling would cause a major crisis for the country. Republicans, however, draw the line at tax increases, and a narrow majority of them oppose raising the debt ceiling under any circumstances.

U.S. DEBT TALKS DEADLINE: The debt ceiling - Where you stand in battle?

House Speaker John Boehner's debt plan was put on hold Thursday night after lacking the needed votes to pass, but he may try again Friday. The frustration about the inability of Congress and President Barack Obama to reach a deal to raise the debt ceiling and prevent a possible government default has sparked a firestorm of anger directed toward Washington.

But there's no shortage of people who believe they have the answer to solving the crisis or who is to blame for it.

As Washington struggles to reach a deal, we are listening to what you have to say about the debt fiasco as well thoughts from influential voices, politicians and analysts.

What is the solution for fixing the debt crisis?

With the both chambers of Congress seemingly unable to come up with a debt-ceiling solution, constitutional law professor Jack Balkin wrote about three ways Obama could bypass Congress and try to solve the crisis on his own.

"We are having a debt-ceiling crisis because Congress has given the president contradictory commands," Balkin said in a CNN.com opinion piece. "Congress has ordered the president to spend money, and it has forbidden him to borrow enough money to obey its orders." But Obama may be able to save the United States from defaulting, he suggests, perhaps by issuing two $1 trillion coins or selling the Federal Reserve an option on $2 trillion in property.

One commenter named svscnn said: "I don't know if I'm relieved or concerned about some of the revelations in this article. While they all seem a bit shady, I suppose it's good to know that there are still some executive options on the table to keep us from going over the brink that Congress has brought us to."

Marc J. Yacht said he thinks that Obama is being “held hostage” and that he should stand his ground in the debt-ceiling debate.

“Use your power of the executive order to break the impasse, if you can,” Yacht told CNN's iReport. “Not raisng the debt ceiling undermines this country's stability. Equity and balance has to be the driving force in this debate.”

Skip Wininge, another iReporter, got so fed up with Congress’ inability to reform the tax structure that he has devised a plan of his own. He uploaded his thoughts to iReport, explaining, “Don’t pay for wars and tax cuts on the backs of senior citizens who barely get by on Social Security and Medicare. They have already paid their dues."

Another solution? "If far-right conservatives can't listen to reason, maybe they will listen to Ronald Reagan," CNN contributor John Avlon argues.

"Because Reagan had stern words for Congress when it tried to play political games with the debt ceiling in 1987. They still ring true today...," he wrote before quoting the late president's exact words. "Congressional Republicans should read that paragraph (from Reagan's speech) out loud twice before going to vote on the debt ceiling in the next few days. It is essentially the same argument Obama has been making. But in our current hyper-partisan environment reason doesn't resonate across party lines. Instead, there is too often an overheated impulse to oppose Obama at any cost. Hearing the same argument from the Gipper might inspire a needed sense of perspective."

Candy Grossi has someone else in mind that Congress should call for help. She said she is weary of the “Washington political game playing” because she doesn’t think that politicians really care what average Americans have to say.

Her advice to Washington? Enlist the help of people who are used to balancing their household budgets.

“Advice for Washington: Bring some normal housewives who have to really work a budget, putting food on the table ... ," she told iReport. "Maybe then our budget will get in line. We need people who don't have any special interest. We need people who really care for the good of our nation, which means our people (all of us).”

CNN also asked former officeholders for their views on how to resolve the debt crisis. What do they think should happen?

Former Sen. Arlen Specter of Pennsylvania said he thinks Obama should hold in reserve the prospect of using the 14th Amendment to get around the debt ceiling.

“This extraordinary assertion of executive authority could be justified because the Congress has, in effect, abdicated its constitutional responsibility to agree on legislation through the bicameral conference before the drop-dead date leaving a vacuum which must be filled if the government is to function,” he said.

Ex-Reagan budget director David Stockman said, “The crisis lies in the debt, not the ceiling. Kicking the can with a six months' ceiling increase is the worst possible alternative because it allows the politicians of both parties to continue making the big fiscal lie.”

Former Sen. John Danforth said the real issue is the size of government. He urges Congress and the president to agree on raising the debt ceiling and to make the 2012 election a vote on the size of government – between Obama’s plan for a government that spends nearly 24% of the gross domestic product and Rep. Paul Ryan’s plan for a smaller government, amounting to about 20% of GDP.

“The appropriate size of federal spending as a percent of GDP will not be resolved by politicians without input from the American people. In other words, it will not be decided before the 2012 presidential election,” Danforth said.

Meanwhile, iReporter Valerie Bass, a Middleburg, Florida, teacher and the wife of an Afghanistan veteran, offers this advice to Congress: “This is not a game. Cut the benefits the politicians have as we can't afford them.”

Bass has a lot more to say in her impassioned iReport: "My husband lost his health and his ability to have a normal life due to his deployment to Afghanistan. We also have two children in college and are counting every penny. We have given our future and our health for this country. We are the military families!"

Who's to blame for the debt-ceiling crisis?

Fareed Zakaria calls the government impasse a self-created crisis, saying the damage is already done.

"My basic point is that this is a crisis that we have manufactured out of whole cloth. We have created a circumstance in which the world doubts our credibility, rating agencies are thinking of downgrading our debt and the dollar's role as the world's reserve currency could be jeopardized," Zakaria writes. "Please understand that none of these things are happening because the United States is running deficits. There was no indication – by any metric – that the United States was having difficulty borrowing money one month ago. In fact, the world has been lending money to the United States more cheaply than ever before.

"We face downgrades and investor panic not because of our deficits but because we are behaving like deadbeats, refusing to pay our bills, pouting while the bill collector waits at the door."

Many iReporters said they are sick of the politics behind the crisis and want lawmakers to put aside their differences and just solve the economic problems.

Steve Rokowski said he is tired of elected officials “hiding behind statements” about how the American system of government works. Those elected officials are the most to blame, according to Rokowski.

“Compromise is essential to get things done," Rokowski told iReport. "We all have to do it daily in our lives; it’s more important for Congress as their decisions are supposed to be for the greater good of the country. Stalemate is not an option. I am tired of our government officials always hiding behind the statements that, 'This is the system our forefathers have put in place.' They didn’t set up a government that was this dysfunctional.”

Who's winning this fight?

Lawrence R. Jacobs, a professor and director of the Center for the Study of Politics and Governance at the University of Minnesota's Humphrey School of Public Affairs, takes a look at the implications across the board and who could walk away a winner or a loser in this war over the debt.

He said that Americans are turning against the GOP in the debt debate because of the party's insistence on cutting government programs only without any tax hikes. And Democrats are winning the argument on Medicare and Social Security. Obama also has a lot at stake here. His talk about the inability of government to get anything done implicates him, too, Jacobs argues. Any talk of a dysfunctional government is hurting his cause, he writes.

"The president's flagging of Washington's 'dysfunction' reinforces the distrust of government that many Americans harbor, oddly making it harder for him to rally support behind government programs such as Medicare and Social Security," he writes. "This may help to explain why the GOP is losing the debt-ceiling debate and yet three-quarters of Americans favor a constitutional amendment to balance the budget."

He adds, "The lessons moving forward are clear. Republican leaders intent on winning the White House and strengthening their position in Congress need to steer their party back to the views of mainstream America or squander what may be setting up as a propitious opportunity in 2012 to run against the 'in' party in a time of deep discontent. As for Democrats, they need to focus like a laser beam on the concrete programs that many Americans rely upon and steer away from the sweeping conclusions about government waste and dysfunction that undergird a genuine philosophical conservatism in America."

But Jeffrey Miron, author of "Libertarianism, from A to Z," writes this public spectacle is a blemish on both parties in part because neither side will concede on their big issues. Democrats won't accept that Medicare is the primary driver of the fiscal nightmare, he argues, and Republicans won't distinguish between two kinds of tax revenue – that from higher tax rates and that from fixing tax loopholes.

"Will the Democrats and Republicans be able to set aside their prejudices?" asks Miron, a senior lecturer and director of undergraduate studies in Harvard University's Economics Department and a senior fellow at the Cato Institute. "Alas, both parties are doing what their respective constituents seem to want, so compromise will not come easily.

"But something must change, and soon. Otherwise, nothing will stop the U.S. fiscal train wreck."

The federal government has four days left to raise the nation's current $14.3 trillion debt ceiling, the Treasury Department said. A failure to do so will risk an unprecedented national default.


If the debt ceiling is not raised by Tuesday, Americans could face rising interest rates and a declining dollar, among other problems.

As the cost of borrowing rises, individual mortgages, car loans and student loans could become significantly more expensive. Some financial experts have warned of a downgrade of America's triple-A credit rating and a potential stock market crash.

Without an increase in the debt limit, the federal government will not be able to pay all of its bills next month. President Barack Obama recently indicated he can't guarantee Social Security checks will be mailed out on time. Other critical government programs could be endangered as well.

U.S. DEBT TALKS: The debt ceiling battle: Where things stand

The federal government has five days left to raise the nation's current $14.3 trillion debt ceiling, the Treasury Department said. A failure to do so will risk an unprecedented national default.

If the debt ceiling is not raised by August 2, Americans could face rising interest rates and a declining dollar, among other problems.

As the cost of borrowing rises, individual mortgages, car loans and student loans could become significantly more expensive. Some financial experts have warned of a downgrade of America's triple-A credit rating and a potential stock market crash.

Without an increase in the debt limit, the federal government will not be able to pay all of its bills next month. President Barack Obama recently indicated he can't guarantee Social Security checks will be mailed out on time. Other critical government programs could be endangered as well.

Where do things stand in the fight to raise the debt ceiling?

House

The GOP-controlled House is scheduled to vote at roughly 6 p.m. ET Thursday on a proposal put forward by House Speaker John Boehner, R-Ohio. Assuming House Democrats remain united against the plan, Boehner will need the support of at least 217 of the House's 240 Republicans to pass it.

All 53 Senate Democrats have promised to oppose the plan if it is passes the House.

Boehner's plan calls for $917 billion in savings over the next decade, while creating a special congressional committee to recommend additional savings of $1.6 trillion or more. It would allow the debt ceiling to be increased by a total of roughly $2.5 trillion through two separate votes. The $2.5 trillion total would be enough to fund the federal government through the end of 2012.

The plan also calls for a congressional vote on a balanced budget amendment to the Constitution by the end of the year.

Senate

Senate Majority Leader Harry Reid's plan would reduce federal deficits over the next decade by at least $2.2 trillion while raising the debt ceiling by $2.7 trillion. Reid has promised additional cuts will be included in the final version of his legislation - enough to meet the GOP's demand that total savings should at least equal any total debt ceiling hike.

Reid's plan would cut spending by $1.8 trillion. Roughly $1 trillion in the savings are based on the planned U.S. withdrawals from military engagements in Afghanistan and Iraq.

Reid's plan also would establish a congressional committee made up of 12 House and Senate members to consider additional options for debt reduction. The committee's proposals would be guaranteed a Senate vote with no amendments by the end of this year.

Obama

Obama has endorsed Reid's plan and threatened a veto of Boehner's plan. The president strongly opposes any bill that doesn't raise the debt ceiling through the 2012 election. Obama has promised to veto any short-term debt ceiling extension unless it paves the way for a "grand bargain" of more sweeping reforms and revenue increases.

The president made a nationally televised plea for compromise Monday night, though he also criticized Republicans for opposing any tax hikes on the wealthy.

"This is no way to run the greatest country on Earth," the president said. "The American people may have voted for divided government, but they didn't vote for a dysfunctional government."

OBAMA COULD BYPASS CONGRESS

Very soon, Congress will raise the debt ceiling. If it does not, it would be the greatest unforced error in American history, a self-inflicted wound that is as disastrous as it was avoidable.


Suppose, however, that the tea party gets its way, and the debt ceiling is not increased. What are President Barack Obama's options?

We are having a debt-ceiling crisis because Congress has given the president contradictory commands; it has ordered the president to spend money, and it has forbidden him to borrow enough money to obey its orders.

Are there other ways for the president to raise money besides borrowing?

Sovereign governments such as the United States can print new money. However, there's a statutory limit to the amount of paper currency that can be in circulation at any one time.

Ironically, there's no similar limit on the amount of coinage. A little-known statute gives the secretary of the Treasury the authority to issue platinum coins in any denomination. So some commentators have suggested that the Treasury create two $1 trillion coins, deposit them in its account in the Federal Reserve and write checks on the proceeds.

Opinion: Both parties are wrong on debt talks

The government can also raise money through sales: For example, it could sell the Federal Reserve an option to purchase government property for $2 trillion. The Fed would then credit the proceeds to the government's checking account. Once Congress lifts the debt ceiling, the president could buy back the option for a dollar, or the option could simply expire in 90 days. And there are probably other ways that the Fed could achieve a similar result, by analogy to its actions during the 2008 financial crisis, when it made huge loans and purchases to bail out the financial sector.

The "jumbo coin" and "exploding option" strategies work because modern central banks don't have to print bills or float debt to create new money; they just add money to their customers' checking accounts.

The government has not discussed either option publicly. There are three reasons for this. First, there may be other legal obstacles to using these options that we don't know about. Second, because these devices could be used over and over again, they might scare investors and be politically unacceptable. Third, the president's political strategy has been to obtain a congressional deal lowering the deficit, and these solutions would take all the pressure off Congress.

However, that calculation could change if the president believes that Congress is simply unable to pass anything, a conclusion he has not yet reached.

Assume that the platinum coin and exploding option strategies are not available. What else can the president do?

Like Congress, the president is bound by Section 4 of the 14th Amendment, which states that "(t)he validity of the public debt of the United States, authorized by law . . . shall not be questioned." Section 4 was passed after the Civil War because the framers worried that former Southern rebels returning to Congress would hold the federal debt hostage to extract political concessions on Reconstruction. Section 5 gives Congress the power to enforce the 14th Amendment's provisions. This does not mean, however, that these provisions do not apply to the president; otherwise, he could violate the 14th Amendment at will.

Section 4 requires the president not to put the validity of the public debt into question. If the debt ceiling is not raised in time, there will not be enough incoming revenues to pay for all of the government's bills as they come due. Therefore he has a constitutional obligation to prioritize incoming revenues to pay the public debt: interest on government bonds and any other "vested" obligations.

What falls into the latter category is not entirely clear, but a large number of other government obligations -- and certainly payments for future services -- would not count and would have to be sacrificed. This might include, for example, Social Security payments.

To be sure, the president could keep paying Social Security if he could keep the total amount of debt constant by redeeming bonds in the Social Security trust fund for cash and immediately selling new bonds to replace them. But the money coming in may not be able to keep pace with the money going out. Even if he tries his best, the president may not be able to pay every Social Security check in full on time.

If the president stopped paying parts of Social Security or other government programs that the public relies on, we would have a partial government shutdown. This would quickly put enormous pressure on Congress to raise the debt ceiling to make it possible to resume normal government operations.

Thus, even if Social Security and other social safety net programs are not part of "the public debt," under Section 4, failure to pay them promptly and in full will probably lead to a political solution to the debt crisis within a week or so. The closest precedent is the 1995 government shutdown precipitated by the Republican-controlled Congress' battle with President Bill Clinton.

Assume, however, that even a prolonged government shutdown does not move Congress to act. Eventually paying only interest and vested obligations will prove unsustainable -- first because tax revenues will decrease as the economy sours, and second, because holders of government debt will conclude that a government that cannot act in a crisis is not trustworthy.

If the president reasonably believes that the public debt will be put in question for either reason, Section 4 comes into play once again. His predicament is caused by the combination of statutes that authorize and limit what he can do: He must pay appropriated monies, but he may not print new currency and he may not float new debt. If this combination of contradictory commands would cause him to violate Section 4, then he has a constitutional duty to treat at least one of the laws as unconstitutional as applied to the current circumstances.

This would be like a statute that ordered the president to hire 50 new employees provided that none of them is a woman. The second requirement violates the Constitution, so the president can hire the 50 employees and ignore the discriminatory provision.

Here the president would argue that existing appropriations plus the debt ceiling create an unconstitutional combination of commands. Therefore he chooses to obey the appropriations bill -- which was passed later in time anyway -- and ignores the debt ceiling. He orders the secretary of the Treasury to issue new debt sufficient to pay the government's bills as they come due.

The big test would be whether the markets treat these new bonds just like older bonds. If they do, or if they demand only a slightly higher interest rate, the president will have avoided economic Armageddon and saved the country's economy -- and the world's. The president and Congress can then move on to the real issue: fighting about future appropriations and revenues.

At this point, the president should ask Congress to ratify his actions by raising the debt ceiling. If they do not, he can continue the process until they do. His actions might set a precedent: Knowing that the president will invoke Section 4, congressional threats of using the debt ceiling to extract political concessions will become a defunct strategy in the future.

In fact, this was one reason why Section 4 was put into the Constitution in the first place.

An angry Congress may respond by impeaching the president. However, if the president's actions end the government shutdown, stabilize the markets and prevent an economic catastrophe, this reduces the chances that he will be impeached by the House. (After all, he saved the country.) Perhaps more important, the chances that he will be convicted by a two-thirds vote of the Senate, which has a Democratic majority, are virtually zero.

The public may regard an impeachment trial as a waste of time, since the ultimate result is clear. In addition, the president will point to the shutdown and the impeachment when he runs against his political opponents in the 2012 election, arguing that they did nothing to save the country from calamity while he has risked impeachment to protect the republic.

The final possibility is that members of Congress will sue the president for ignoring the debt ceiling. Under existing Supreme Court precedents, groups of individual congressmen would not probably have standing to sue. It is possible that a contrived suit could be created by bond holders, but courts will probably see through it. Moreover, even if the bond holders have standing, the courts will likely treat the constitutional issues as nonjusticiable under the "political question" doctrine, as they do in the case of war powers.

In fact, the struggle between the president and Congress is similar to recent disputes over the president's power to use military force to protect national interests or in emergency situations. If the courts won't intervene in the Libya affair, they probably won't intervene here.

It is still unlikely that things will get this far. Our Constitution, however, was designed to deal with extreme situations when ordinary politics fails. Let us hope that our institutions do not fail us now.

U.S. DEBT TALKS focus on a new bipartisan $3.7 trillion debt reduction plan Wednesday -- the latest effort to avoid a potentially catastrophic default next month

Washington – Top administration and congressional officials are expected to focus on a new bipartisan $3.7 trillion debt reduction plan Wednesday -- the latest effort to avoid a potentially catastrophic default next month on the federal government's financial obligations.


President Barack Obama offered strong praise for the initiative on Tuesday, calling it "broadly consistent" with his own approach to the current debt ceiling crisis because it mixes tax changes, entitlement reforms and spending reductions.

Senate Democratic leaders, however, expressed skepticism that they will be able to increase the debt limit and pass the plan -- drafted by members of the chamber's so-called "Gang of Six" -- by the August 2 deadline.

If Congress fails to raise the current $14.3 trillion debt ceiling by that date, Americans could face rising interest rates, a declining dollar and increasingly jittery financial markets, among other problems.

The seriousness of the overall situation was reinforced last week when a major credit rating agency, Standard and Poor's, said it was placing the United States' sovereign rating on "CreditWatch with negative implications." Another major agency -- Moody's Investors Services -- said it would put America's bond rating on review for a possible downgrade.

House Republicans approved a "cut, cap and balance" plan Tuesday night that would raise the debt ceiling while imposing strict caps on all future federal spending and making it significantly tougher to raise taxes -- the solution favored by hard-line conservatives. The GOP plan -- which also requires Congress to pass a balanced budget amendment to the Constitution before raising the debt ceiling -- has little chance of clearing the Democratic-controlled Senate or surviving a certain presidential veto.


The vote did, however, allow rank-and-file Republicans to clearly demonstrate their preference for steps favored by many in the tea party movement even as their leadership seeks a middle ground with Democrats.

"While President Obama simply talks tough about cutting spending, House Republicans are taking action," House Speaker John Boehner, R-Ohio, said in a statement after the sharply polarized 234-190 vote.

Obama said before the vote that legislators "don't have any more time to engage in symbolic gestures."

"We have a Democratic president and administration that is prepared to sign a tough package that includes both spending cuts (and) modifications to Social Security, Medicaid and Medicare that would strengthen those systems and allow them to move forward, and would include a revenue component," Obama added. "We now have a bipartisan group of senators who agree with that balanced approach. And we've got the American people who agree with that balanced approach."

Obama also refused to rule out a fallback plan proposed by Senate Minority Leader Mitch McConnell, R-Kentucky, that would raise the debt ceiling up to $2.5 trillion through the 2012 election.

Under the Gang of Six plan -- put together by three Democrats and three Republicans -- $500 billion in budget savings would be immediately imposed, with marginal income tax rates reduced and the controversial alternative minimum tax ultimately abolished.

The plan would create three tax brackets with rates from 8% to 12%, 14% to 22%, and 23% to 29% -- part of a new structure designed to generate an additional $1 trillion in revenue. It would require cost changes to Medicare's growth rate formula, as well as $80 billion in Pentagon cuts.

"We've gone from a Gang of Six to a Mob of 50," an upbeat Sen. Joe Manchin, D-West Virginia, told reporters as he left a Tuesday meeting on Capitol Hill where other senators were briefed on the blueprint.

Sen. Tom Coburn, R-Oklahoma, announced that he had decided to rejoin the group. Coburn had recently withdrawn from the Gang of Six due to a dispute over entitlement cuts, but declared Tuesday that the plan, which now includes $116 billion in entitlement health care cost savings, has "moved significantly, and (is) where we need to be."

A Democratic congressional source said on condition of not being identified that the private meeting with senators to unveil the plan erupted in applause when Coburn, a conservative deficit hawk, announced he had rejoined the Gang of Six.

Other legislators supporting the plan included two conservative Republicans -- Sen. Lamar Alexander of Tennessee and Rep. Roger Wicker of Mississippi -- while another GOP conservative, Sen. Jeff Sessions of Alabama, raised questions about whether it achieves necessary spending cuts and raises taxes.

A spokesman for Boehner said it was similar in concept to what Boehner and Obama had discussed in their negotiations so far, "but also appears to fall short in some important areas." Other House Republican leaders, including Majority Leader Eric Cantor of Virginia and Budget Committee Chairman Rep. Paul Ryan of Wisconsin, also questioned the Gang of Six plan's call for increased tax revenue and commitment to reducing future costs.

Senate Majority Leader Harry Reid, D-Nevada, meanwhile, noted that the Constitution requires revenue bills to originate in the House, while his assistant majority leader, Sen. Dick Durbin of Illinois, pointed out that the plan still must be drafted into legislative language and analyzed by the Congressional Budget Office before it can be considered.

"It's not ready for prime time," said Durbin, one of the Gang of Six negotiators.

Reid said he's open to incorporating some elements of the proposal into a separate bill that he and McConnell are drafting as a fallback option to prevent the U.S. government from defaulting on its debt.

Several new public opinion polls, meanwhile, show that a majority of Americans want legislators to compromise on a deficit reduction deal instead of refusing to yield from their starting positions.

A CBS News poll released Monday indicates that two-thirds of Americans say any agreement should include spending reductions and tax hikes, with 28% saying a deal should only include spending cuts and 3% saying it should only include tax increases.

According to the survey, there is little partisan divide on the question. More than seven out of 10 Democrats and more than two-thirds of independent voters support a balanced approach, as do 55% of Republicans and 53% of self-described tea party movement supporters.


A Quinnipiac University poll released last week had similar findings. The survey indicated that two-thirds of the public supported a deal that included spending cuts as well as tax increases for wealthy Americans and corporations. Nearly nine out of 10 Democrats and two-thirds of independents in the survey supported the inclusion of tax increases, with Republicans divided on the issue.

The GOP initiative -- which would require any new tax increases to be approved by two-thirds of the members of the House and Senate -- stands in sharp contrast to Obama's stated preference for a package of roughly $4 trillion in savings over the next decade, composed of tax increases on the wealthy and spending reforms in Medicare, Social Security and elsewhere.

Hopes for such a so-called "grand bargain" appeared to have faded in recent days, partly because Republicans have continued to insist that any tax increases could derail an already shaky economic recovery. It was not immediately clear whether the Gang of Six proposal would be able to revive those hopes.

At the heart of the tax dispute has been Obama's call for more revenue by allowing tax cuts from the Bush presidency to expire at the end of 2012 for families making more than $250,000. The president's ideal plan would keep the lower tax rates for Americans who earn less.

Obama noted last week he is not looking to raise any taxes until 2013 or later. In exchange, the president said, he wants to ensure that the current progressive nature of the tax code is maintained, with higher-income Americans assessed higher tax rates.

But resistance to higher taxes is now a bedrock principle for most Republicans, enforced by conservative crusaders such as political activist Grover Norquist. His group, Americans for Tax Reform, has sponsored a high-profile pledge to oppose any tax increase.

The pledge has been signed by more than 230 House members and 40 senators, almost all of them Republicans.

Despite their differences, leaders from both parties insist they are committed to reaching an agreement that will allow them to raise the debt ceiling before August 2. McConnell's fallback proposal would give Obama the power to raise the borrowing limit by a total of $2.5 trillion, but also require three congressional votes on the issue before the 2012 general election.

Specifically, Obama would be required to submit three requests for debt ceiling hikes -- a $700 billion increase and two $900 billion increases. Along with each request, the president would have to submit a list of recommended spending cuts exceeding the debt ceiling increase. The cuts would not need to be enacted in order for the ceiling to rise.

Congress would vote on -- and presumably pass -- "resolutions of disapproval" for each request. Obama would likely veto each resolution. Unless Congress manages to override the president's vetoes -- considered highly unlikely -- the debt ceiling would increase.

The unusual scheme would allow most Republicans and some more conservative Democrats to vote against any debt ceiling hike while still allowing it to clear.

McConnell and Reid are also working on two critical additions to the plan, according to congressional aides in both parties. One would add up to roughly $1.5 trillion in spending cuts agreed to in earlier talks led by Vice President Joe Biden; the other would create a commission meant to find more major spending cuts, tax increases and entitlement reforms.

Changes agreed to by the commission -- composed of an equal number of House and Senate Democrats and Republicans -- would be subject to a strict up-or-down vote by Congress. No amendments would be allowed.

Sources say the panel would be modeled after the Base Closing and Realignment Commission, which managed to close hundreds of military bases that Congress could not otherwise bring itself to shut down.