WASHINGTON — A Wall Street credit-rating agency issued a fresh warning Wednesday about the U.S. government's increasingly fragile bond rating as President Barack Obama continued to press congressional leaders for the "largest deal possible" to trim future federal budget deficits, though there was no public sign of progress.
Moody's Investors Service warned that it's placed the government's Aaa bond rating on review for a possible downgrade, "given the rising possibility that the statutory debt limit will not be raised on a timely basis."
If it isn't raised by Aug. 2, Treasury Secretary Timothy Geithner warns, the government will default on its debt, risking chaos in financial markets and a return to recession. Independent analysts echo the warning.
Federal Reserve Chairman Ben Bernanke joined the warning chorus Wednesday in testimony before the House Financial Services Committee. He echoed fears that if negotiations over raising the limit fail and the U.S. defaults on its loans, it could trigger economic chaos in the U.S. and across the globe. Bernanke warned of a "huge financial calamity" that would "affect everybody and would set job creation back very significantly.
"Clearly, if we went so far as to default on the debt it would be a major crisis, because the Treasury security is viewed as the safest and most liquid security in the world."
The Moody's warning "ought to be enough incentive to do something already,' said Rep. Jeff Flake, R-Ariz. "Congress tends to act when they're staring into the abyss. I guess we're just not close enough yet."
Bernanke also suggested that lawmakers who oppose raising the debt ceiling, likening it to balancing a checkbook, are wrong.
"The right analogy for not raising the debt limit is going out and having a spending spree on your credit card and then refusing to pay the bill," he said. "That's what not raising the debt limit is."
Obama met at the White House for the fourth straight day with congressional leaders, scrambling to find a solution to the growing financial crisis, as key lawmakers took a serious look at a Senate Republican plan that would allow the president to increase the nation's debt limit without being required to cut spending.
White House Press Secretary Jay Carney insisted that there was progress, though neither side appeared publicly to be yielding much ground
"Contrary to some of what you hear in the public sphere, there is momentum towards achieving significant deficit reduction in a balanced way," Carney said before the meeting.
At the Capitol, Democrats had generally positive reviews for a last-ditch plan pitched Tuesday by Senate Republican leader Mitch McConnell of Kentucky. Senate Majority Leader Harry Reid, D-Nev., said he was studying the plan and discussing it with his colleagues.
"It's something that we have to look at very closely," Reid said. "I'm heartened by what I read. This is a serious proposal."
Under McConnell's plan, Congress would pass a bill that authorized Obama to make three debt-limit requests.
The first would be submitted before Aug. 2. The president would seek a $700 billion increase that should meet government obligations through the fall. Along with that, there would be a provisional $100 billion for the U.S. to avoid default. Later, he'd seek two $900 billion increases.
Each time, Obama also would submit proposed spending cuts that exceeded the debt limit amount. But those cuts wouldn't be binding, a feature that conservatives protest.
"I just think that is the fox in the henhouse, and I am really apprehensive about such a proposal," said Rep. Steve King, R-Iowa.
Tea party leaders also were upset. "Mitch McConnell's plan shows plainly he wants to abdicate any responsibility for fiscal matters to the president," said Mark Meckler, a co-founder and national coordinator of the Tea Party Patriots. "We send our representatives in Congress like Senator McConnell to Washington to represent us and pass legislation that responds to the voters, not to pass the buck off to the executive branch."
The debt limit ceilings would go into effect unless Congress said no. And since Obama would veto any rejection, the higher debt limits are almost sure to go into effect, since it would take two-thirds majorities of each house to override a presidential veto and Democrats could block that.
While most lawmakers emphasized that the plan was hardly their preferred route to raising the debt limit, many said they wouldn't reject it.
House Minority Leader Nancy Pelosi, D-Calif., suggested McConnell's plan has merit because it recognizes that the debt ceiling needs to raised.
"It has merit in that it says, 'What are we talking about here? We have to pass this,' " she said.
Carney also didn't rule out the Republican plan, but called it a "fallback backup option" and "not the preferred option."
He said Obama would continue to press for a larger plan to trim $4 trillion over 10 years with spending cuts and tax increases, a measure that Republicans said they couldn't pass because they wouldn't tolerate tax hikes.
Republican leaders said that while there appeared to be little movement toward agreement, they held out hope.
"There is not a single debt-limit proposal that can pass the House of Representatives," said House Majority Leader Eric Cantor, R-Va., "but I believe the path forward is to focus on what we can agree upon, and though it doesn't go as far as our budget, House Republicans can likely agree with the general spending cuts and entitlement changes in the 'big deal' proposed by the president."
The May-June bipartisan talks headed by Vice President Joe Biden are thought to have identified around $1.1 trillion in cuts for discretionary spending, or programs such as education and transportation.
More savings could come from "mandatory" spending on programs such as federal retirement, farm aid and possibly Medicare and Medicaid. Obama hasn't yet offered details of his own plan, and Carney said Wednesday that he wouldn't "publicly say what all of our positions are on these issues, because that's stuff that's happening in the negotiating room."
A Senate debate and vote Wednesday, though, illustrated the difficulty of passing politically unpopular proposals. Senate Democrats pushed a nonbinding "sense of the Senate" measure that said that "those earning $1 million or more per year must make a more meaningful contribution to the deficit reduction effort."
It essentially died when it fell nine votes short of the 60 needed to cut off unlimited debate. Fifty-one Democrats voted to end debate, while 47 Republicans, as well as Sens. Ben Nelson, D-Neb., and Mark Pryor, D-Ark., voted no.
The measure "doesn't specify what that is, doesn't say if it should be tax increases or spending cuts that should have an impact on these high-income earners," said Sen. John Thune, R-S.D.
He called it "vague and ambiguous and meaningless (and it) doesn't do anything to address the fiscal challenges that our country faces."
MORE FROM MCCLATCHY