A bipartisan group of U.S. senators on Tuesday revived an ambitious budget plan that could provide new ideas for breaking the impasse in Congress over raising the nation's credit limit by August 2.

President Barack Obama threw his support behind the proposal by the "Gang of Six" senators, saying it was broadly consistent with his approach on reducing debt and deficits.

Obama urged Senate Majority Leader Harry Reid, a fellow Democrat, and Senate Republican leader Mitch McConnell to start "talking turkey" about it.

Senate Budget Committee Chairman Kent Conrad, one of the six Democratic and Republican senators who have been working since December on a deficit-reduction plan, said the proposed $3.75 trillion in savings over 10 years contains $1.2 trillion in new revenues.

The group briefed about half of the 100-member Senate and "the response was very favorable," Conrad told reporters.

He said the group asked fellow senators to take 24 hours to look at the proposal and "report back to us."

According to an executive summary of the plan, it would immediately impose $500 billion in deficit cuts, cut security and non-security spending over 10 years with spending caps, make the Medicare and Medicaid healthcare programs operate more efficiently and abolish the Alternative Minimum Tax.

Asked whether the plan could become part of urgent negotiations that link deficit reduction to raising the U.S. government's borrowing authority by August 2, Conrad said: "Could the two get married? Could they get combined at some point? I'm sure that's possible."

But leaders must first find out whether the proposal has enough support in the Senate, he said.

But a senior Senate Democratic aide said, for now, "there are no discussions" on incorporating Gang of Six ideas into legislation to raise the debt limit beyond $14.3 trillion.

TAXES AT ISSUE

Conrad was quick to say that while there are $1.2 trillion in new revenues, the overall plan envisions a $1.5 trillion tax cut that would be achieved through broad tax reforms.

Most Republicans, especially Tea Party members in the House of Representatives, have vowed to block any revenue increases.

The Senate group's hope has been that if the three conservative Republican members embrace revenue increases, the idea could catch fire among other Republicans in the Senate and House -- especially if popular but expensive entitlement programs such as Medicare also shoulder some cuts.

In another politically risky move, the Gang of Six plan would achieve significant savings in healthcare programs, Conrad said. The specific spending cuts would be decided later by congressional committees.

Conrad said a separate measure would reform the Social Security retirement program to stabilize its finances for the next 75 years.

The effort got a boost as conservative Republican Senator Tom Coburn rejoined the group after taking a "sabbatical" in mid-May amid heavy disagreement over Medicare spending cuts. It was not yet clear how Coburn's concerns have since been addressed.

On Monday, Coburn unveiled his own plan to cut $9 trillion in deficits over a decade, including nearly $1 trillion in revenue increases.

Revenue proposals are not likely to include income tax rate increases. Instead, they could center on repealing or rolling back special tax favors such as those for ethanol blenders and companies that operate corporate jets, as well as preferential tax treatment for fund managers.

Those specific decisions likely would be up to House and Senate tax-writing committees, along with broader tax reform questions.

The Chinese government, the top international investor in U.S. Treasuries, urged the U.S. government to get its debt under control or its credibility will suffer.

"We hope the U.S. government will take responsible policies and measures to boost global financial market confidence and respect and protect the interests and investors," said the Chinese government's State Administration of Foreign Exchange in a statement on its website.
The Chinese statement referred to U.S. debt as "the reflection of the credibility of the U.S. government" and an important investment tool.

The Chinese government also said it "noticed the opinion expressed by S&P and other rating companies regarding the credibility rating of the U.S. sovereign debt," offering an unpleasant reminder of a recent credit rating action.

In April, Standard & Poor's said the United States was at risk of having the triple-A rating on its debt lowered within two years if Washington can't agree on bringing down the national deficit. The agency lowered the outlook on America's long-term credit rating to "negative" from "stable."

In Washington on Tuesday, a bipartisan group of Senators called the Gang of Six put forward a plan to slash the nation's deficit by about $3.7 trillion over ten years. The plan has received praise from other senators and President Obama.

Debt ceiling delay would be 'chaotic'

Meanwhile, U.S. lawmakers are locking horns over whether they should increase the debt ceiling by Aug. 2. Failure to raise the debt ceiling could result in a default

U.S. lawmakers got another stern warning from a leading credit rating agency on Thursday that there is now a very real possibility that the country's top-notch credit rating could be downgraded in the next three months.

Print

Standard & Poors said in a statement it was placing the United States' sovereign rating on "CreditWatch with negative implications."

"[O]wing to the dynamics of the political debate on the debt ceiling, there is at least a one-in-two likelihood that we could lower the long-term rating on the U.S. within the next 90 days," the agency said in a statement.

The action on Thursday follows a move in April when S&P changed its outlook on the U.S. AAA rating to "negative" because at the time it couldn't see how lawmakers would create a path to real debt reduction.

Bernanke: Debt ceiling breach 'calamitous'

Since then "the political debate about the U.S.' fiscal stance and the related issue of the U.S. government debt ceiling has, in our view, only become more entangled," the agency said.

"[W]e believe there is an increasing risk of a substantial policy stalemate enduring beyond any near-term agreement to raise the debt ceiling," S&P noted.

Indeed, other warnings from ratings agencies Moody's and Fitch in the interim spurred more rhetoric than action from politicians. Seven weeks' worth of talks between the parties led by Vice President Joe Biden broke down in June after House Majority Leader Eric Cantor left the negotiations.

And regular meetings at the White House between President Obama and Capitol Hill brass over the past two weeks have showed no signs of real progress. Obama will hold a press conference Friday to offer an update on the negotiations.

A downgrade of U.S. credit would mean interest rates on U.S. bonds would go up. And it could have ramifications across global markets because U.S. bonds are considered the world's safe haven investment.

The Treasury issued an immediate response to the news.

"Today's action by S&P restates what the Obama Administration has said for some time: That Congress must act expeditiously to avoid defaulting on the country's obligations and to enact a credible deficit reduction plan that commands bipartisan support," Treasury official Jeffrey Goldstein said. (Read: Republican stance on taxes a bust with public)

A downgrade could come for one of three reasons, S&P explained:

-- If Congress and the administration fail to come up with a "credible solution" to U.S. debt and show no signs of agreeing on one in the foreseeable future.

-- If the United States misses any scheduled debt service payments, in which case S&P would issue a "selective default" meaning a default has occurred on some bonds but not others.

-- If S&P concludes that the debt ceiling debate so bogs down that it calls into question policymakers' "willingness and ability to timely honor the U.S.' scheduled debt obligations."

Treasury started sending letters to Congress back in January urging them to raise the $14.3 trillion debt ceiling -- which is the U.S. legal borrowing limit

The Treasury takes in, on average, about $125 billion less than it has to pay out on a monthly basis. To make up the difference it issues U.S. bonds, and because of the country's sterling rating, it is able to do so at very low rates.

If Congress doesn't raise the debt ceiling by Aug. 2, the Treasury will no longer be able to pay all of the country's bills in full and on time without interruption

The public pressure on lawmakers to raise the debt ceiling was ratcheted up Wednesday when a major rating agency said it would put the sterling bond rating of the United States on review for possible downgrade.

Moody's Investors Services said it had initiated the review because of "the rising possibility" that Congress will fail to raise the debt ceiling by Aug. 2 -- something that could lead to a U.S. default on its debt.

If the debt ceiling isn't raised by then, the Treasury Department says it will no longer be able to pay all the country's bills in full and on time without being allowed to borrow new money. (Read: Debt ceiling FAQ)

"Moody's considers the probability of a default on interest payments to be low but no longer to be de minimis," Moody's said in a statement.

The United States enjoys its AAA rating in part for having always stood behind its debt and paid its bills on time. As a result, U.S. Treasury bonds are considered the world's safe-haven investment.

The Treasury Department issued an immediate response Wednesday.

"Moody's assessment is a timely reminder of the need for Congress to move quickly to avoid defaulting on the country's obligations and agree upon a substantial deficit reduction package," Treasury official Jeffrey A. Goldstein said in a statement.
Debt ceiling: Chaos if Congress blows it

In the still unlikely event the United States would default on any of its interest payments to bondholders, Moody's said it expected the default to be short-lived and the loss to bondholders "minimal or non-existent."

But, the agency added, a default "would fundamentally alter Moody's assessment of the timeliness of future payments." Translation: The United States would be downgraded to AA status.

Beyond the debt ceiling: Even if lawmakers raise the debt ceiling in time, Moody's also made clear that it is expecting progress on the long-term debt.

The agency said it would likely change its outlook on the AAA rating to "negative" from "stable" absent a "substantial and credible" debt-reduction deal.

Moody's had alerted investors in early June that it was considering putting the U.S. rating under review unless it saw forward movement in the debt talks by mid-July. It cited as a concern the "heightened polarization" in the debate.

Since then, negotiations led by Vice President Biden to find a compromise broke down and the prospects for a "grand bargain" have been called into question.

Market reaction: Just how the bond market -- i.e., the investors around the world who lend to the federal government -- will respond to Moody's action is not clear yet.

Bond traders may take note but not blink since the agency already signaled its intention -- "so no surprise factor," said Steve Van Order, a fixed income strategist at Calvert Investments.

And Moody's isn't the ultimate arbiter.

"The bond market will follow its own judgment of how Washington is approaching deficit reduction, not the decisions of the rating agencies," said Jim Vogel, head of interest rate strategies at of FTN Financial.

But, Vogel noted, "Moody's action will focus the market's attention on the debt ceiling more than it has been in recent days. Rating agency actions also may provide a rationale for policy makers to alter their voting stance as deadlines loom."
Bernanke: Default would cause 'major crisis'

Moody's isn't the first ratings agency to announce a negative action.

In April, Standard & Poor's revised its outlook on the country's AAA rating to negative from stable.

S&P's reason: Relative to its peers, the United States has "very large budget deficits and rising government indebtedness and the path to addressing these is not clear to us."

Fitch Ratings, meanwhile, said in early June that if lawmakers fail to raise the debt ceiling by Aug. 2, it would put the country on "ratings watch negative," meaning there is a "heightened probability" of a rating change.

Timothy Geithner said Thursday that he plans to stay on as Treasury Secretary for the foreseeable future. But that hasn't stopped speculation about who might take his place later this year.

Sources told CNN and other news outlets Thursday that Geithner is considering leaving the Obama administration later this year, once negotiations on raising the government's debt ceiling and cutting the budget deficit are complete.

Geithner's family is moving back to the New York suburbs where they lived before he took office so his son can finish high school there. And as the head of Treasury through the worst financial crisis in a generation, and the last key member of President Obama's original economic team still on the job, a desire to leave wouldn't be a shock.

Geithner tried to tamp down the reports of his imminent departure when speaking in Chicago Thursday by saying he wasn't planning on leaving anytime soon.

Still, economists and Washington experts were already talking about who might take over the high-profile job.

Near the top of the list is current White House Chief of Staff Bill Daley, a close Obama confidant and someone who was brought in at least partly because of his good relationship with the business community.

Before taking the job in the administration earlier this year, Daley had been an executive at JPMorgan Chase (JPM, Fortune 500). He also served as Secretary of Commerce in the second term of the Clinton Administration.

Also at the top of many lists is Erskine Bowles, the Democratic co-chairman of the president's bipartisan commission on cutting the budget deficit. Bowles, who had served as White House Chief of Staff in the Clinton administration, would be an relatively easy pick to get confirmed given the budget cutting emphasis in Congress today, according some experts.

But when contacted Friday, Bowles, 65, appeared to take himself out of running for the job, saying that he is not interested in any full-time job at this point in his career.

"I am looking forward to being useful in part-time endeavors," he said.

Investment banker Roger Altman is another name that has been mentioned, but his name has surfaced for previous openings on the Obama economic team without ever getting tapped for a position.

And White House Budget Director Jacob Lew, who has been central to negotiations on the debt ceiling and deficit reduction, is another name suggested by experts.

Jamie Dimon, chairman and CEO of JPMorgan Chase, who is often described as "Obama's favorite banker" is another prominent name mentioned. A spokesman for the nation's second largest bank holding company had no comment on whether his boss would be interested in the job.

Greg Valliere, chief political strategist, Potomac Research Group, said he doesn't think it'll be a good idea for Obama to pick someone from Wall Street, given the government help banking giants like JPMorgan -- along with rivals likeCitigroup (C, Fortune 500) and Bank of America (BAC, Fortune 500) -- received during the crisis three years ago.

"I just think that Wall Street is not the way they would go. It could be an albatross for this administration," said Valliere. "And having him berating [Federal Reserve Chairman Ben] Bernanke in public three weeks ago certainly didn't help his case."

Valliere said that he thinks Obama should try to go with a high-profile Treasury Secretary outside of banking and Washington -- someone like Berkshire Hathaway (BRKA, Fortune 500) Chairman Warren Buffett, an earlier supporter of Obama four years ago, or New York Mayor Michael Bloomberg.

"I think he should do something bold and swing for the fences. I think Mike Bloomberg would be an electrifying pick," he said. "The only problem is that he could stray from the reservation on the message. But he's an entrepreneur who knows about creating jobs."

Bloomberg has denied interest in an administration post in the past, and has said he intends to complete his term as mayor which runs through 2013. A spokesman in the mayor's press office declined to comment Friday.

But the political reality is that it might be impossible to get any replacement for Geithner confirmed by the Senate in the year before a presidential election, said Jaret Seiberg, a research analyst at MF Global Inc.'s Washington Research Group.

Seiberg pointed out that 44 Republican senators have vowed not to confirm any nominee to head the new Consumer Financial Protection Bureau because they want the new agency's powers substantially trimmed. The same political battle could lead that group to block a Treasury nominee as well, he said. Even Alexander Hamilton would have trouble getting confirmed today, he said.

"The problem is there is no ideal candidate out there," said Seiberg. "I think it's a Herculean task to get anyone through the Senate right now. That's why at the end of the day, we're likely to have Geithner stay in place."

Valliere said if confirmation becomes the major hurdle to a new Treasury chief, he could see Secretary of State Hillary Clinton moving over to Treasury, with Sen. John Kerry taking her spot at State. Past and current senators have an easier time winning confirmation than do outsiders, he said. And he said that the Treasury job has become a diplomatic job as much as a finance job in the current interconnected global economy

Greece's recently approved austerity plan might not resolve deeper questions over how the country will repay its debts beyond this summer, but it appears one of the world's biggest investors still has faith in the country and and the greater eurozone. After all, it would be too risky not to.

Earlier this week, just days before the Greek Parliament approved austerity measures amid talks of a possible default, China said it would keep investing in Europe's sovereign debt. Premier Wen Jiabao told reporters that the country actually increased the purchase of government bonds of some European countries and hadn't scaled back its euro holdings.

These acts "show our confidence in the economies of Europe and the eurozone," he said.

China's backing isn't all that surprising. It was only earlier this year when the Asian giant supported debt-ridden Spain by signing $7.3 billion in deals that included investments in everything from energy to banking to oil. And it was around this time last year that China pledged to make more than a dozen major commercial contracts for business in Greece.

The value of these purchases may very well be in flux amid debt problems that have put many investors on alert, but that's beside the point of China's voracious appetite. China has more to gain than lose by investing in Europe's future. Even as misery and uncertainty mounts in the region, the eurozone is still China's largest export market (accounting for roughly 20% of total shipments) and it's in its own interest to contain the crisis.

"They're not really concerned about short-term volatility," says Domenico Lombardi, senior fellow specializing in international monetary relations and global currencies at Brookings Institution.

Besides, as China expert Barry Naughton of the University of California in San Diego, pointed out earlier this year: The risks are relatively low since the European Union and the European Central Bank will likely swoop into the rescue if things get really bad.

Wednesday's $41 billion worth of budget cuts and asset purchases was part of a large-scale bailout launched last year to help debt-troubled Greece pay its loans. The European Union and the International Monetary Fund had required Greek lawmakers to pass the plan before releasing its next round of rescue payments.

China's foreign-exchange reserve, worth more than $3 trillion, is by far the biggest in the world and is viewed by politicians and corporate executives as a key source of capital. It's unclear just how much China has boosted its holdings of European bonds, as leaders keep the breakdown of its holdings secret. But just by saying it will invest in Europe, China indirectly calms markets and helps stabilize the euro, and in a way, sends a message to the world at large that it's a good global neighbor willing to help in times of crisis.

Longer-term, the Chinese have been looking to diversify its massive reserves away from the volatile U.S. dollar. To be sure, the euro has also seen its share of peaks and valleys throughout the crisis but the currency is still the most practical alternative to the greenback, says Lombardi, whose research has focused on the ongoing European crisis.

This surely isn't the last time we'll hear the Chinese back the eurozone. If and likely when financial instability rumbles in other parts of Europe in the coming months, we'll probably hear from the Chinese again.