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Debt Talks in Disarray as House Balks

John Boehner
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John Boehner

WASHINGTON — With the federal government on the brink of a default, a House Republican effort to end the shutdown and extend the Treasury's borrowing authority collapsed Tuesday night as a major credit agency warned that the United States was on the verge of a costly ratings downgrade.

After the failure of the House Republican leadership to find enough support for its latest proposal to end the fiscal crisis, the Senate's Democratic and Republican leaders immediately restarted negotiations to find a bipartisan path forward. A spokesman for Senator Harry Reid of Nevada, the majority leader, said Mr. Reid was "optimistic that an agreement is within reach" with Senator Mitch McConnell of Kentucky, the Republican leader.

With so little time left, chances rose that a resolution would not be approved by Congress and sent to President Obama before Thursday, when the government is left with only its cash on hand to pay the nation's bills.

(Read more: Buffett: Debt limit is 'weapon of mass destruction')

"It's very, very serious," warned Senator John McCain, Republican of Arizona. "Republicans have to understand we have lost this battle, as I predicted weeks ago, that we would not be able to win because we were demanding something that was not achievable."

A day that was supposed to bring Washington to the edge of resolving the fiscal showdown instead seemed to bring chaos and retrenching. And a bitter fight that had begun over stripping money from the president's signature health care law had essentially descended in the House into one over whether lawmakers and their staff members would pay the full cost of their health insurance premiums, unlike most workers at American companies, and how to restrict the administration from using flexibility to extend the debt limit beyond a fixed deadline.

Even so, the House speaker, John A. Boehner, Republican of Ohio, and his leadership team failed in repeated, daylong attempts to bring their troops behind any bill that would reopen the government and extend the Treasury's debt limit on terms significantly reduced from their original push against funding for the health care law. The House's hard-core conservatives and some more pragmatic Republicans were nearing open revolt, and the leadership was forced twice to back away from proposals it had floated, the second time sending lawmakers home for the night to await a decision on how to proceed Wednesday.

"We're trying to find a way through it," said Representative Greg Walden of Oregon, the chairman of the National Republican Congressional Committee, emerging from Mr. Boehner's office to announce that no votes would be held Tuesday night.

The House setback returned the focus to the Senate, where the leadership had suspended talks after the Senate Republican leadership opted to give the House a chance to produce an alternative to the Senate measure taking shape.

Under the emerging Senate deal, the government would be funded through Jan. 15 and the debt limit extended until Feb. 7. House and Senate negotiators would be required to reach accord on a detailed tax-and-spending blueprint for the next decade by Dec. 13. A proposal to delay the imposition of a tax on medical devices had been dropped from the deal, as had a complicated tax on self-insured unions and businesses participating in the health care exchanges. All that remained for Republicans was language tightening income verification for people seeking subsidies on the insurance exchanges, but that language was still being negotiated.

More from The New York Times:
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Default Deadline Clear, Implications Are Not

It remained unclear if the Senate plan could pass the House or even if Mr. Boehner would bring it forward for a vote. The hopes for a resolution by Thursday also appeared to rest with the senators who had begun the failed movement to tie any further government funding to the gutting of the Affordable Care Act: Ted Cruz, Republican of Texas, and Mike Lee, Republican of Utah.

If Mr. Reid and Mr. McConnell reach a final accord, Senate leaders expect to use a parliamentary maneuver that will allow the majority leader to quickly move the deal to the Senate floor on Wednesday. With unanimous consent, a final vote would come the same day. But if Senate hard-liners object, the Senate would have to wait until Friday, then muster 60 votes to cut off debate. Further obstruction would mean the final vote would happen Saturday, when the bill would go back to the House, where it would pass only if it had overwhelming Democratic support since many Republicans would not vote for it.

(Read more: Washington deadline could be nail biter for markets)

Given the progress that had been made in the Senate, Congressional Democrats and officials at the White House criticized Mr. Boehner's move on Tuesday as an attempt to sabotage the bipartisan Senate talks even as they seemed to be nearing an agreement.

Initially, Mr. Boehner proposed a bill to reopen the government until Jan. 15, extend the debt ceiling until Feb. 7, delay a tax on medical devices two years and deny members of Congress, the president, the vice president and White House political appointees taxpayer subsidies to help buy insurance on President Obama's health insurance exchanges.

"We're trying to find a way forward in a bipartisan way that would continue to provide fairness to the American people under Obamacare," Mr. Boehner said as he acknowledged "there are a lot of opinions" among his rambunctious members.

By Tuesday afternoon, House Republican leaders were back with a new proposal to fund the government through Dec. 15, extend the debt ceiling into February and deprive not only lawmakers but all their staff members of employer assistance to buy their health care. By extending that provision to staff members, Republican leaders hoped to appeal to its far-right flank, but it angered more moderate Republicans and was not enough for the conservative hard core.

Complicating the speaker's task, Heritage Action, the conservative Heritage Foundation's political arm, which wields great influence with the most conservative elements of the Republican Party, opposed the plan.

"I think there's always hope there can be a final package I can vote on, but this is not the one," said Representative Ted Yoho, Republican of Florida, as he and two other Tea Party conservatives left the speaker's office.

(Read more: Markets trust Washington, but for how long?)

Republican leaders had initially hoped the loss of members like Mr. Yoho could be made up with support from Democrats. But Democratic leaders made it clear they would offer no assistance. Democrats latched on to a provision in the House proposals that would have forbidden the Treasury to juggle government accounts — so-called extraordinary measures — to meet obligations beyond a debt-ceiling deadline.

In the midst of the turmoil, the credit rating agency Fitch put the United States on a "negative ratings watch," warning that Congressional intransigence has put the full faith and credit of the government at risk.

The news came as the Treasury Department said it had only about $35 billion in cash on hand. It expects to run out of "extraordinary measures" to keep on paying all of the government's bills on Thursday, at which point outgoing payments might exceed that cash, plus any revenues, on any day going forward.

As the United States nears default, investors have demanded more compensation for lending to the government, with yields on short-term debt spiking to their highest levels in years.

Fitch warned that Congress has not "raised the federal debt ceiling in a timely manner." It said that it "continues to believe that the debt ceiling will be raised soon," but that "political brinkmanship and reduced financing flexibility could increase the risk of a U.S. default."

By Jonathan Weisman of The New York Times. Annie Lowrey and Ashley Parker contributed reporting.

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