Debt Ceiling 2013: McConnell Hits The Brakes

Senate Minority Leader Mitch McConnell, R-Ky., has reportedly temporarily hit the brakes on a bipartisan plan he’s working on with Majority Leader Harry Reid, D-Nev., to avert the first-ever U.S. default and reopen the government.

According to Politico, McConnell halted the negotiations to see whether House Republicans could pass their current proposal. The House GOP announced it will vote on a plan to fund the government until January, raise the debt limit until February, make changes to Obamacare and lawmakers' health plan, and delay the medical device tax for two years.

McConnell’s delay could be dangerous though, as House Speaker John Boehner, R-Ohio, on Tuesday said several opinions exist in his conference regarding what shape the House bill should take, and no decision has been made as of Tuesday at midday. The U.S. Treasury’s borrowing authority runs out on Oct. 17, at which point it won’t have enough money to meet its obligations.

The now 15-day government shutdown has also kept 800,000 nonessential federal workers off the job.

Boehner does not have a specific plan of action, House Minority Leader Nancy Pelosi, D-Calif., said, adding that the speaker also clearly doesn’t have the votes to pass his proposal.

The White House has indicated that it could support the proposal being drafted in the Senate, as it is encouraged by the bill's bipartisan shape. Further, White House spokesman Jay Carney characterized the House's late-game legislative effort as merely time-wasting:

“We believe there is a solution there for this manufactured, unnecessary crisis,” Carney said at a press conference on Tuesday at midday. Carney did say, though, that the Senate leaders were “far from a deal at this point.”

Without an increase in the borrowing authority, the Treasury will have slightly more than $36 billion cash on hand with which to pay its bills. Some Republicans have argued that the U.S. will not default, as the Treasury can choose to prioritize its payments. But many economists disagree, arguing that a partial default still counts as a default, one that would destabilize U.S. and global stock, bond, currency and other markets, among other negative consequences.

Further, experts aren’t entirely clear whether the U.S. Treasury has the legal authority to prioritize certain payments over others.

“The automated systems at the Treasury are built to pay all of the bills, on time,” said Mattea Kramer, research director at the National Priorities Project. “Trying to redesign the Treasury payments systems at the 11th hour because Congress hasn’t raised the debt ceiling is playing with fire -- and it’s just unlikely to work. It takes time to re-engineer a system of that size. Thus it appears that the first bill that goes unpaid will just be the first bill that comes up for payment when the Treasury runs out of cash. It’s not clear if that will be a payment to a creditor -- putting the U.S. Treasury in the position of defaulting on its debt payments -- or if it will be an internal payment, for instance, for Medicare benefits, or Social Security checks, or a payment to a military contractor for building a weapons system. Given this reality, I would say it definitely creates worries for creditors.”

At least by midday Tuesday, the markets were still discounting that Democrats and Republicans would reach a deal before Thursday: The Dow was down only 51 points to 15,250, and bond and currency markets were calm. Gold was down $6 to $1,271 an ounce.

Reid has said the House bill “can't pass the Seante and won't pass the Senate.”