Pat Dollard

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WSJ:

WASHINGTON — President Barack Obama on Sunday said that leaders of both parties have reached an agreement to lift the U.S. debt ceiling, reduce the federal deficit and avoid a U.S. credit default, an announcement welcomed in early trading on the Asia financial markets.

Both the U.S. House and Senate were expected to meet Monday to discuss the details of the plan, which calls for increasing the debt ceiling by $2.4 trillion through the end of 2012 along with $2.4 trillion in deficit reduction.

“It will allow us to avoid default,” said Mr. Obama, who spoke at the White House press briefing room Sunday evening on short notice.

Separately, House Speaker John Boehner (R., Ohio) told Republicans on Sunday night that they have reached the framework for an agreement with the president to raise the debt-ceiling, according to a lawmaker on a Sunday night conference call.

On the conference call, Mr. Boehner told lawmakers that he intended to move forward with the plan as soon as possible according to excerpts of his remarks released by his office.

“My hope would be to file it and have it on the floor as soon as possible,” Mr. Boehner said on the conference call. “I realize that’s not ideal, and I apologize for it. But after I go through it, you’ll realize it’s pretty much the framework we’ve been operating in.”

Mr. Obama provided few details in his remarks on Sunday evening. Congressional aides said the plan would raise the debt ceiling by $2.4 trillion in three stages and provide initially for roughly $900 billion in spending cuts over 10 years. A special committee of lawmakers would be charged with finding another $1.5 trillion in deficit reduction through a tax overhaul and changes to safety-net programs.

Mr. Obama said Washington needed to get the plan to the finish line and through both chambers of Congress. “We are not done yet,” he said. “I urge members to do the right thing and support this deal with your vote.”

Sens. Harry Reid (D., Nev.) and Mitch McConnell (R., Ky.) took the Senate floor to say they had reached the framework of an agreement and would brief their respective lawmakers on Monday morning. A senior Senate Democratic aide said that a vote hadn’t yet been scheduled but it is likely to occur on Monday.

“I am relieved to say that leaders from both parties have come together for the sake of our economy to reach a historic, bipartisan compromise that ends this dangerous standoff,” Mr. Reid said. “The compromise we have agreed to is remarkable not only because of what it does, but because of what it prevents: a first-ever default on the full faith and credit of the United States.”

“There is a now a framework to review that will ensure significant cuts in Washington spending,” Mr. McConnell said on the Senate floor.

Asian markets opened sharply higher, with the Nikkei 225 in Japan up 165 points, or 1.68%, at 9 p.m. in Washington, shortly after the president announced a deal had been struck.

For all the down-to-the wire drama, the deal leaves the hardest questions unanswered, setting up months and years of additional debate and fiscal pain. It imposes spending caps for the next 10 years, but leaves the details of what programs would be cut to congressional committees.

And it launches a ferocious, months-long argument over how to rewrite the tax code and what changes to make in popular programs like Social Security and Medicare—issues that were ultimately shelved in this debate.

So while one uncertainty would be lifted from the economy with the increase in the debt ceiling, a series of others would be prolonged.

Raising the government’s borrowing limit has mostly been a routine vote in Congress over the years. The battle arose this time because many lawmakers said they wouldn’t raise the $14.29 trillion debt ceiling unless it were tied to a deficit-reduction package. Treasury officials have warned for months that without an increase in the debt ceiling by Aug. 2, the government could run short of cash to pay its bills, including payments to veterans, contractors and Social Security recipients.

The two parties have struggled for weeks to resolve their differences on spending and debt issues, with accusations and angry name-calling on both sides, as the public looked on with—polls suggest—growing distaste. Even if the fight is over for now, it may take a long time for the political wounds to heal.

“I hope that this agreement will assure the American people that we will meet our obligations—not only fiscally, but also that we will meet our obligations to them to govern,” said Sen. John McCain (R., Ariz.). “The last approval ratings of Congress I saw, both sides of the aisle, was about 16%. And I have yet to find anyone in that 16% category.”

Some economists warned that the size and certainty of the deficit cuts aren’t enough for the U.S. government to avoid a downgrade of its top-notch credit rating. “The sword of Damocles, in the form of a potential ratings downgrade, still hangs over the head of the U.S. and the global financial system,” said Harm Bandholz, chief U.S. economist for UniCredit Research. Other experts have been more sanguine, predicting a rating downgrade would produce only a small rise in interest rates.

The Senate is likely to approve any deal inked by party leaders. But the House is a much tougher question, given that GOP conservatives last week forced Speaker John Boehner (R., Ohio) to withdraw and rewrite a plan that he had crafted and urged them to support. After he toughened the language in the bill, the House narrowly approved it.

A deal would likely be rejected by the most liberal Democrats and conservative Republicans. Democrats are upset because the spending cuts will hit social programs and aren’t accompanied by tax increases.

But some Republicans feel that the cuts didn’t go deep enough. A key question for Mr. Boehner is whether he can persuade more than half of the 240 House Republicans to approve the deal, since failure to do so would raise questions about how much support he has from his caucus.

“We must get something done as quickly as possible, and I believe all sides are aware of the urgency,” said Senate Majority Leader Harry Reid (D., Nev.). He described himself as “cautiously optimistic,” but added, “Optimism in recent days has often been stomped on.”

Both parties are emerging damaged by the fight, which put the country’s economy at risk as they bickered over who was being more stubborn. Many Democrats are angry that Republicans won so many concessions on spending cuts, and they blame Mr. Obama for, as they see it, giving in too easily.

On the Republican side, lawmakers backed by the tea-party movement flexed their muscles throughout the debate, but their confrontations with party leaders raise questions about their future role in the GOP.

The debate also established the precedent that an increase in the government’s borrowing limit can serve as an occasion for the opposition party to extract concessions from the president. That is of great concern to many in the White House.

The building blocks of the deal have been bandied about by the participants for weeks. Messrs. Obama and Boehner were, for a time, seeking a “big deal” to cut spending by $3 trillion and raise perhaps $1 trillion in revenue, but those talks broke down twice. A week ago, congressional leaders believed they were on the brink of a deal much like the one that now appears imminent.

The final push began late Saturday, when the two sides nailed down their basic framework. It provides for an immediate debt limit increase of about $400 billion, accompanied by spending cuts of $900 billion over 10 years. How much of those spending cuts would come from the defense budget remained a contentious issue until the very end.

A congressional “super-committee” of six Democrats and six Republicans will be charged with finding about $1.5 trillion more in deficit reduction. They are expected to come mostly from changes to entitlement programs like Social Security and Medicare and from a sweeping tax overhaul.

If the committee fails to act, or if Congress refuses to adopt its proposals, an array of prearranged cuts would kick in.

The nature of that backup package of cuts, or “trigger,” was among the final sticking points for negotiators. They settled on $1.2 trillion in cuts, of which part would be in defense spending and part in nondefense spending, including payments to Medicare health-care providers. The cuts wouldn’t affect programs for low-income households, Social Security, Medicaid and other areas of Medicare spending.

The debt-ceiling increase would be done in three phases: $400 billion initially; another $500 billion later this year that would be subject to a congressional vote of disapproval; and a third increase early next year of $1.5 trillion, which would provide the government with enough cash to cover all its bills through 2012, would also be subject to a vote.

Now that a deal appears all but finalized, the next few days will unfold as a frenzied attempt to put the pieces in place. The Senate must vote on the package, followed by a high-stakes vote in the House, with key roles played by Mr. Boehner and Minority Leader Nancy Pelosi (D., Calif.).

The White House and Senate leaders believe that a landslide vote for the package in the Senate would make it politically difficult for House rebels to kill it, especially days before the government begins running out of money to pay its bills.