WASHINGTON — The Republican-controlled House of Representatives approved emergency legislation Friday night to avoid an unprecedented government default, but Senate Democrats scuttled the plan less than two hours later in hopes of a better deal.
“We are almost out of time” for a compromise, President Obama warned as U.S. financial markets trembled at the prospect of economic chaos.
Lawmakers in both parties said they were determined to avoid a default, yet there was little evidence of progress — or even significant negotiations — toward compromise.
The House vote was 218-210, almost entirely along party lines, on a Republican-drafted bill to provide a quick $900 billion increase in U.S. borrowing authority — essential to allow the government to continue paying its bills — along with $917 billion in cuts from federal spending.
It had been rewritten overnight to say that before any additional increase in the debt limit could take place, Congress must approve a balanced-budget amendment to the Constitution and send it to the states for ratification.
That marked a concession to Tea Party-backed conservatives and others who had thwarted an effort by House Speaker John Boehner (R., Ohio) to pass the bill Thursday night.
Less than two hours after the House passed the revised measure, Senate Democrats rejected it without a debate. The vote was 59-41, with all Democrats, two independents, and six Republicans joining in opposition.
Those voting to reject the House measure were Sens. Sherrod Brown (D., Ohio), Carl Levin (D. Mich.), and Debbie Stabenow (D., Mich.). Republican Sen. Rob Portman of Ohio voted in favor of it.
Earlier in the House, Democrat Marcy Kaptur and Republican Jim Jordan voted against the Boehner bill while Republican Bob Latta voted for it.
Michigan Democrat John Dingell voted no and Republican Tim Walberg voted for it.
Senate Majority Leader Harry Reid (D., Nev.) unveiled an alternative that would cut spending by $2.4 trillion and raise the debt limit by the same amount, enough to meet Mr. Obama’s terms that it tide over the Treasury until 2013.
“This is likely our last chance to save this nation from default,” Mr. Reid said.
The House, eager to return the Senate’s favor of rejecting the Boehner bill, set a vote to nix Mr. Reid’s proposal Saturday.
The Senate set a test vote at about 1 a.m. Sunday, a middle-of-the-night roll call that underscored the limited time available to lawmakers.
While Mr. Reid appealed for bipartisanship, he and other party leaders accused Mr. Boehner of caving in to “the last holdouts of the Tea Party,” as Sen. Richard Durbin of Illinois called them.
Republicans conceded that the overnight delay had weakened Mr. Boehner’s hand in the endgame with Mr. Obama and Senate Democrats.
But the House speaker drew applause from his rank and file when he said the House, alone, had advanced legislation to cut deficits and that he had “stuck his neck out” in recent weeks in hopes of concluding a sweeping deficit reduction deal with President Obama.
In the Senate, Democrats conceded that they still lack the votes to repel a filibuster threat from Republican senators.
But Mr. Reid urged Senate Republican leader Mitch McConnell of Kentucky to join him in reworking the Democratic measure so the Senate could pass it and send it back to the House before financial markets open Monday morning.
“The last train is leaving the station, and this is a last chance to avert a default,” Mr. Reid said in a speech on the Senate floor, arguing that the House bill would force Washington to endure another economy-rattling fistfight over the debt limit within a few short months.
“I say no, not again will we fight another battle like the one in which we are now engaged,” Mr. Reid added. “But default is not an option, either. And we cannot wait for the House any longer. I ask my Republican friends, break away from this thing going on in the House of Representatives.”
Though several Republican senators said a bipartisan compromise presents the only logical way to break the stalemate, Mr. McConnell’s immediate response was not encouraging.
Mr. McConnell accused Democrats of “rounding up ‘no’ votes to keep this crisis alive,” and noted the House had passed two bills to raise the debt limit and the Senate none.
Still, Senate Democrats said they had received “positive signals” from Republican leaders.
Before the House vote, President Obama made a televised plea for compromise, arguing that the two parties are not “miles apart” and that he was prepared to work “all weekend long until we find a solution.”
Both the House and Senate bills call for cutting deeply into agency budgets over the next decade and creating a 12-member committee tasked with identifying trillions of dollars in additional cuts by the end of this year.
Mr. Reid’s bill would extend the $14.3 trillion debt limit into 2013, however, while the bill from Mr. Boehner would give the Treasury a reprieve only until February or March.
If the committee failed to come up with $1.8 trillion in savings, the Boehner plan would force another battle over whether to grant the Treasury additional borrowing power.
In his remarks, Mr. Obama said the two sides are “in rough agreement” about the size of the first round of spending cuts and that “the next step” to rein in borrowing should be a debate over “tax reform and entitlement reform.”
“If we need to put in place some kind of enforcement mechanism to hold us all accountable for making these reforms, I’ll support that too, if it’s done in a smart and balanced way,” Mr. Obama said.
Administration officials say that without legislation in place by Tuesday, the Treasury no longer will be able to pay all its bills.
The result could inflict significant damage on the economy, they add, causing interest rates to rise and financial markets to sink.
Executives from the country’s biggest banks met with Treasury officials to discuss how debt auctions would be handled if Congress fails to raise the borrowing limit before Tuesday’s deadline.
The Dow Jones industrial average suffered through a sixth straight day of losses and bond yields fell as investors sought safer investments in the event of a default.
Meanwhile, officials for the Moody’s credit ratings agency indicated the United States will likely keep its top-notch credit rating for now, despite the “limited magnitude” of the deficit reduction plans being discussed in Washington.
But Moody’s warned in a report that the confirmation of the AAA credit will likely come with a negative outlook, meaning a risk of a downgrade in the medium term.
That decision will depend on the U.S. economic performance in 2012 and prospects for future deficit-reduction measures, Moody’s analyst Steven Hess said.
“If we’re convinced that the economy takes off in 2012 and shows very strong growth, that makes the whole process of fiscal consolidation somewhat easier,” Mr. Hess told Reuters.
Moody’s issued the report to clarify its position on the nation’s debt situation, its Chief Risk Officer Richard Cantor said.
“Sometimes there is confusion and all the ratings agencies are grouped together,” he said.
Standard & Poor’s has threatened to cut U.S. ratings in the next few months if the lawmakers fail to come up with a meaningful plan to cut the nation’s deficit.
Both agencies seem to agree that deficit-reduction measures of around $4 trillion would be enough for the United States to avoid a rating downgrade.