Debt limit gives GOP leverage, Obama demands fix

WASHINGTON (AP) — The political fight that

took the nation to the verge of defaulting on its debts last year is

back, overshadowed

by "fiscal cliff" disputes but with consequences far graver than

looming tax hikes and steep spending cuts.

The government is on track to hit its $16.4

trillion borrowing limit later this month. And while the Treasury can

keep the

government functioning through early next year, President Barack

Obama is bluntly insisting that any deal on the fiscal cliff

include an end to brinkmanship on the debt ceiling.

Obama is demanding tax rate hikes on the

rich, using the prospect of a worse alternative and the momentum of his

re-election

as leverage. But the debt ceiling gives Republicans a powerful

weapon to extract further deficit reduction too, contributing

to the current stalemate.

Both sides have warned that plunging off the fiscal cliff — letting income taxes increase for all and kicking in deep cuts

in defense and other programs — could rattle the fragile economic recovery.

But failure to raise the borrowing cap would leave the government unable to pay its debts. That would roil the stock market,

result in a likely downgrade in the nation's credit rating, increase interest rates and threaten another financial crisis.

Last year's fight prompted Standard & Poor's to reduce the AAA rating for government bonds.

That risk gives Republicans the weight to counter Obama in fiscal cliff talks and demand that the president agree to greater

spending reductions or savings from programs such as Medicare, Medicaid and even Social Security.

House Speaker John Boehner, R-Ohio, says any

increase in the debt limit must be matched by greater amounts of

deficit reduction.

Boehner, who has been leading the fiscal cliff talks for

Republicans, spoke with Obama by telephone Wednesday, signaling the

possible start of fresh talks to avoid the fiscal cliff. Specifics

of their discussion were not released.

Speaking to corporate executives the same day, Obama set down a hard line.

"If Congress in any way suggests that

they're going to tie negotiations to debt ceiling votes and take us to

the brink of

default once again as part of a budget negotiation — which, by the

way, we had never done in our history until we did it last

year — I will not play that game," the president said.

"Because we've got to break that habit before it starts," he said.

Treasury Secretary Timothy Geithner said on CNBC on Wednesday, "We are not prepared to have the American economy held hostage

to periodic threats that Republicans will force the country to default on our obligations."

To that end, Obama is asking to make

permanent a mechanism used to implement last year's $2.2 trillion debt

limit hike. That

mechanism, designed by Senate Minority Leader Mitch McConnell,

R-Ky., requires the president to notify Congress of the need

to lift the debt ceiling and request an increase in the borrowing

cap. The request would not require congressional approval,

but Congress could pass a resolution to disapprove the increase,

and the president could veto any such move.

McConnell called Obama's proposal "a power grab that has no support here."

"It gives the president of the United States unilateral power to raise the limit on the federal credit card, the so-called

debt ceiling, whenever he wants, for as much as he wants," McConnell said.

Senate Majority Leader Harry Reid, D-Nev., sought a vote on the president's debt limit scheme on Thursday but was blocked

by McConnell, who objected to subjecting the idea to a simple majority tally instead of the 60 votes typically required to

pass controversial legislation. But Democrats pointed out that McConnell had pressed for a vote just Thursday morning and

had introduced the measure.

"The minority leader filibustered his own bill," Sen. Charles Schumer, D-N.Y., said.

Last year, Republicans agreed to the debt ceiling scheme only after the White House agreed to steep cuts in spending that

virtually matched the increase in the debt ceiling, a deal Obama is not offering to make this time.

"To demand a political price for Congress to do its job responsibly, which is to ensure that the United States of America

pays its bills, would be wildly irresponsible," White House spokesman Jay Carney said Wednesday.

In seeking to eliminate the debt ceiling as a

recurring confrontation, Obama and his administration have the support

of congressional

Democrats and some key members of the business community.

John Engler, the former three-term Republican governor of Michigan and now president of the Business Roundtable, has called

for a five-year extension of the debt ceiling, arguing against its use as a bargaining chip for deficit reduction.

Mark Zandi, chief economist at Moody's

Analytics and an occasional adviser to lawmakers, said what to do with

the debt ceiling

needed to be resolved this month. He said he preferred getting rid

of the debt ceiling in exchange for a requirement that

increases in the debt limit by matched by a certain amount of

deficit reduction, either through spending cuts or revenue increases.

If not resolved, he said, "it's going to be nothing but trouble going forward, given how the parties are working with each

other."

Some constitutional experts believe Obama

could sidestep a battle with Congress by raising the debt ceiling by

executive order.

Many legal scholars cite Section 4 of the 14th Amendment as an

argument against congressional approval of debt ceiling increases.

It states, "The validity of the public debt of the United States,

authorized by law, including debts incurred for payment

of pensions and bounties for services in suppressing insurrection

or rebellion, shall not be questioned."

But the White House has rejected that option, both in the midst of debt ceiling discussions last year and again this week.

"This administration does not believe the 14th amendment gives the president the power to ignore the debt ceiling," Carney

said Thursday.