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Politics, Ideology Overshadow Debt Limit Talks

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OBAMA DEBT SPEECH
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(Reuters) - In the looming fight over raising the debt limit, Washington will have its eye on two deadlines: July 2011 and November 2012.

The first is the date by which Congress will likely have to act in order to ensure that the United States doesn't default on its $14 trillion in accumulated debt.

The second deadline is when President Barack Obama and most members of Congress will face voters.

What has often been a routine, if unpleasant, vote could this year turn into a battleground in the 2012 campaign as Republicans and Democrats advance clashing ideological visions of the nation's priorities.

Fresh from pushing through the largest domestic spending cuts in history, Republicans hope to use the debt limit debate as a vehicle to win bigger cuts and satisfy conservative Tea Party activists who handed them control of the House of Representatives last year.

They will also promote a deficit-reduction plan that relies on permanent spending curbs, lower taxes and scaled-back government health programs as they try to wrestle control of the White House and the Senate from Democrats.

Obama and his Democrats will lay out a rival vision of deficit reduction through a mix of lower spending and tax increases for the wealthy, arguing that getting the country's fiscal house in order does not require wholesale cuts to popular programs.

The battle is likely to stretch out for months and could bring the world's most powerful economy to the brink of default -- a prospect that would have far more serious implications for investors and the U.S. economy than the government shutdown that was narrowly averted less than two weeks ago with a last-minute deal on spending reductions.

"Shutting down the government is like a really bad stomach ache. The debt limit is like a heart attack," said Norm Ornstein, a congressional analyst at the conservative American Enterprise Institute.

POSTPONING D-DAY

Unlike nearly every other advanced economy, the United States requires legislative approval for any increase in the amount of money it can borrow. Congress has voted to raise the debt limit 10 times since 2001 as annual budget deficits brought on by wars, tax cuts and the worst recession since the 1930s pushed the country deeper into debt.

The Treasury Department estimates it will hit its current limit of $14.294 trillion by May 16, though it could use a variety of tricks to stave off default until early July.

Some observers think Treasury could postpone a default for several more weeks beyond that.

Whatever the final deadline, Congress isn't likely to act much before then.

"The unwritten rule of Congress is: Why do today what you can put off until tomorrow?" said Dan Ripp, an analyst at New York securities firm Bradley Woods.

Though a default isn't likely, the almost inevitable brinkmanship could unnerve investors who are already rattled by Standard & Poor's warning that it might strip the United States of its prized triple-A credit rating unless Obama and Congress can find a way to slash the deficit within two years.

That would erode the status of the United States as the world's most powerful economy and the dollar's role as the dominant global currency.

Ripp said he wouldn't be surprised if investors pushed up the yield on the benchmark 10-year Treasury bond by 20 or 30 basis points if the debate stretches beyond May 16.

CHANGING ROUTINES

In the past, the politics on a debt-limit vote have been relatively straightforward. The party in power talks about the need to ensure the continued soundness of the country's credit and votes for an increase; the party out of power inveighs against irresponsible fiscal policies and votes against.

Obama, who is now pushing to raise the debt ceiling, voted against an increase as a member of the Senate in 2006, when George W. Bush was in the White House.

Nearly every single Republican in the Senate voted for a debt-ceiling increase that year. Three years later, when Democrats held power, every Senate Republican but one voted against an increase. Democrats have followed the same pattern.

This year, the politics are more complicated, as House Republicans have to find common ground with the Democrats who control the Senate.

Obama hopes that a consensus can be reached in bipartisan talks led by Vice President Joe Biden and that they would wrap up by late June.

But another bipartisan group may be a better bet. The so-called "Gang of Six" -- three Republicans and three Democrats in the Senate -- have been quietly meeting over the past months in an effort to forge a deficit-reduction plan that could win support in both parties.

One thing appears certain: Congress will not pass a "clean" bill, free of extraneous conditions, as Obama wants.

Republican leaders say any bill that passes the House will have to include long-term spending limits, and even Democrats who control the Senate say spending cuts will need to be part of the package.

"The debt limit presents an opportunity for us to make some significant reforms in the budget process," said Republican Susan Collins, a key swing vote in the Senate.

That could take the form of a balanced-budget amendment to the U.S. Constitution -- but it's unlikely to become law as it would also need to win passage in 38 of the 50 state legislatures. Hard caps on federal spending, tied to economic growth, are a more likely option.

Democrats could back a limited cap that excludes benefit programs like food stamps and unemployment benefits, according to a congressional Democratic aide.

But at this point, Republicans aren't saying exactly what they want.

Even if Republicans include spending limits in the package, they still might not have enough votes to pass it through the House. House Speaker John Boehner was forced to rely on Democratic votes to pass record spending cuts last week after 59 Republicans voted against the deal on the grounds that it did not go far enough.

This time, Democrats might not bail Boehner out.

"I don't think the Democrats should give them any votes," said Representative Peter DeFazio, an outspoken liberal Democrat.

"People say, 'Oh my God, it would be a financial catastrophe.' Yes it would, but guess who's first in line for the financial catastrophe: the people on Wall Street. ... Let them pick up the phone and educate the Republicans on how destructive these threats are."

(Additional reporting by Caren Bohan; Editing by Kieran Murray)

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