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US Congress Enters Crucial Week in Battles Over Budget, Debt Limit

FILE - The US flag flies next to the Capitol in Washington, as Congress and the Obama Administration continue work to open the government and raise the debt ceiling.
FILE - The US flag flies next to the Capitol in Washington, as Congress and the Obama Administration continue work to open the government and raise the debt ceiling.
As the U.S. government moved into the second week of a shutdown on Monday with no end in sight, a deadlocked U.S. Congress also confronted an Oct. 17 deadline to increase the nation's borrowing power or risk default.
Republican House of Representatives Speaker John Boehner vowed not to raise the U.S. debt ceiling without a “serious conversation” about what is driving the debt, while Democrats said it was irresponsible and reckless to raise the possibility of a U.S. default.
The last big confrontation over the debt ceiling, in August 2011, ended with an 11th-hour agreement under pressure from  shaken markets and warnings of an economic catastrophe if there was a default.
A similar last-minute resolution remained a distinct possibility this time as well.
In comments on Sunday television political talk shows, neither Republicans nor Democrats offered any sign of impending agreement on either the shutdown or the debt ceiling, and both blamed the other side for the impasse.
“I'm willing to sit down and have a conversation with the president,” said Boehner, speaking on ABC's “This Week.”  But, he added, U.S. President Barack Obama's “refusal to negotiate is putting our country at risk.”
On CNN's “State of the Union” program, Treasury Secretary Jack Lew said: “Congress is playing with fire,” adding that Obama would not negotiate until “Congress does its job” by reopening the government and raising the debt ceiling.
Equities investors were unnerved by the apparent hardening of stances over the weekend, with European shares falling to a four-month low on Monday. U.S. stock futures pointed to lower open on Wall Street, with S&P 500 futures futures down nearly 1 percent.
China, the biggest holder of U.S. Treasuries, urged Washington to take decisive steps to avoid a crisis and ensure the safety of Chinese investments.
“The United States is totally clear about China's concerns about the fiscal cliff,”  Vice Finance Minister Zhu Guangyao said in the Chinese government's first public comment on the Oct. 17 deadline.
“We hope the United States fully understands the lessons of history,” Zhu told reporters in Beijing, referring to the downgrade of the U.S. credit rating by Standard & Poor's in 2011.
China held $1.277 trillion of U.S. Treasuries as of last July, according to U.S. Treasury data released month.
“Who should be worrying most of a possible U.S. default?” asked Deutsche Bank analysts.
“Looking at the top holders of U.S. Treasuries, recipients of U.S. social security should be most concerned, followed by the Fed and then China.”
“In theory, the first group can pressure congress and end up with other funds to fill the gap left by Treasury losses. Meanwhile the Fed has a money printing press to cover any losses, so that leaves the Chinese with a dilemma.”
In early trading Monday, the price of U.S. Treasury notes , a benchmark of the bond markets, rose about 0.2 percent after closing lower on Friday.
The dollar index, which measures the greenback's value against a basket of widely traded currencies, fell 0.2 percent.

Shutdown, debt celing issues merged
The two issues of the Federal government shutdown and the debt ceiling started out separately in the House but have been merged by the pressure of time.
Conservative Republicans in the House have resisted funding the government for the current fiscal year until they extract concessions from Obama that would delay or defund his signature healthcare law, which launched Oct. 1.
Many of the conservatives want a similar condition placed on raising the debt ceiling, but in his list of debt-ceiling demands Sunday, Boehner did not mention the Affordable Care Act, commonly known as Obamacare.
“It's time to talk about the spending problem,” said Boehner, including measures to rein in costs of entitlement programs such as the Social Security retirement system and Medicare, the government-run health insurance program for seniors.
Harry Reid, leader of the Democratic-led Senate, is expected to decide soon on whether to try to open formal debate on a “clean” bill, without extraneous issues attached, to raise the U.S. Treasury's borrowing authority.
Passage of such a measure would require at least six of the Senate's 46 Republicans to join its 54 Democrats in order to overcome potential procedural hurdles that opponents of Obamacare could erect.
According to one Senate Democratic aide, the debt limit hike might be coupled with a new initiative to reform the U.S. tax code and achieve long-term savings in Social Security and Medicare, whose expenses have soared along with the population of retirees.
Republican lawmakers have floated other ideas, such as a very short debt limit increase, which would create time for more negotiations at the expense of further market uncertainty, and repeal of a medical device tax.
The tax is expected to generate some $30 billion over 10 years to help pay for healthcare insurance subsidies under Obamacare.
Some Democrats favor repealing the tax, but they insist that replacement revenues be found and repeal be considered only after the government reopens and the debt limit is raised.

Major problems in house
Agreement in the Senate would send the snarl of issues back into the House, where the Republican caucus has adopted a hard line on both Obamacare and the debt ceiling.
There may be enough votes in the House to pass a clean bill, according to some analysts. That would require almost all of the House's 200 Democrats and about 20 of its 232 Republicans to vote in favor. But taking such a vote would require Speaker Boehner to violate his policy against bringing a vote on any legislation favored by less than a majority of House Republicans.
In any case, neither side is moving toward accommodation, and the stakes rise with the passage of time.
For any deal to work, negotiators probably would have to choreograph a multipronged approach that allows all sides to declare victory, even if it is one that sets up another battle in mid-November or December.
While the shutdown itself is unlikely to cause major disruption in the markets, a fight over the debt ceiling could. From July 31 thru Aug 2 during the debt-limit standoff in 2011, the S&P 500 index lost 3 percent, and the deadlock led to a downgrade of the U.S. credit rating to AA-plus from AAA by S&P.
The outlooks from Moody's and S&P, the only agency so far to have lowered its rating on U.S. debt, are both at “stable,” but Fitch Ratings has indicated a negative outlook for the U.S. debt rating.
All three agencies have said the U.S. debt profile has improved substantially over the past two years, with gross domestic product growth, while slow, proving to be persistently positive and the budget deficit trending lower.
Fitch said in a note last week that the U.S. rating is at risk in the current showdown over the debt ceiling because failure to raise it sufficiently in advance of the deadline, raises questions about the full faith and credit of the United States to honor its obligations.
Political gridlock remains the greatest risk to the U.S. outlook, Fitch said in the note on Oct. 1, the first day of the partial government shutdown.
“This 'faith' is a key underpinning of the U.S. dollar's global reserve currency status and reason why the US 'AAA' rating can tolerate a substantially higher level of public debt than other 'AAA' sovereigns,” Fitch said.
Investors have so far been relatively sanguine about the approaching debt ceiling deadline, but market measures of anxiety, such as the Chicago Board Options Exchange's Volatility Index, have begun trending up since the shutdown began last Tuesday. The VIX rose 18 percent last week and briefly hit its highest level since June.

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