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Some conservatives warn Republicans against debt limit fight

By Richard Cowan

WASHINGTON (Reuters) - As Republicans in the Congress struggle to find a strategy for forcing big spending cuts on President Barack Obama, some conservative voices are warning against taking the country to the brink of a debt default as the strategy for winning the budget wars.

"We would encourage the administration and the Congress of the United States, first and foremost, don't default. That's a bad idea," said U.S. Chamber of Commerce Executive Vice President Bruce Josten on Thursday.

An historic U.S. government default could send global financial markets reeling as the world's biggest economy would not be able to borrow money needed to operate its federal government or pay certain creditors - many of them in Beijing and Tokyo.

The matter will come to a head in mid- to late-February, when the Treasury Department will run out of ways to finance the country's debt without breaching a $16.4 trillion debt limit set in law.

A showdown between Democrats and Republicans is looming after Obama warned that he will not negotiate on the debt limit.

House of Representatives Speaker John Boehner, politically weakened by recent budget battles including the "fiscal cliff," has different ideas. He is insisting that any debt increase be accompanied by spending cuts and government reforms of a greater amount than the debt ceiling hike.

Republicans want those savings to be mainly achieved by reforming huge "entitlement" programs such as the Social Security retirement plan and the Medicare and Medicaid healthcare programs for the elderly, disabled and poor.

In each of the past four years, Washington has piled an additional $1 trillion onto its mountain of debt. "It's a big damn deal," said Josten's boss, Chamber of Commerce President Thomas Donohue, during a Thursday press conference.

And while the nation's largest business group does not like the idea of even flirting with default, it does think that Washington needs to "focus" on its debt problems, Donohue said, telling reporters that entitlement program savings were its highest priority in 2013.

Earlier this week, former House Speaker Newt Gingrich, a conservative firebrand who unsuccessfully ran in 2012 for the Republican presidential nomination, issued his own warning of peril for fellow Republicans.

Engaging in a debt limit fight, he told MSNBC, was "frankly, a dead loser." In the end, he predicted, Republicans would face so much pressure that "they'll cave."

That was followed by an op-ed column in Thursday's Wall Street Journal in which conservative Republican operative Karl Rove warned his party that it likely will have to "support a debt increase all Republicans wish" was not necessary and that Republicans should not hold out for the "perfect."

The Republican goal of winning structural changes to entitlement programs, Rove also said, may be beyond reach for now. "That's the cost of losing the 2012 election," he wrote.

MULLING THEIR OPTIONS

Democrats and Republicans are still gauging how best to position themselves for the upcoming debt limit fight, as well as additional battles over steep automatic government spending cuts due to begin on March 1. That will be followed by a March 31 deadline for either enacting additional funding measures or shutting down government agencies.

Boehner's House Republicans will hold a retreat next week in Williamsburg, Virginia, to try to map out a strategy. House Democrats will do the same in early February in Leesburg, Virginia outside of Washington, D.C.

Spokesmen for Boehner and Senate Republican leader Mitch McConnell would not comment directly when asked whether either leader was willing to chance a government default in their quest to trim spending.

In an interview with the Wall Street Journal published on Monday, Boehner said that the debt limit is "one point of leverage" but not the "ultimate leverage." That, he was quoted saying, is the automatic spending cuts known as the "sequester."

Boehner spokesman Kevin Smith did not comment directly when asked whether the Speaker was signaling that he would step away from the default "cliff."

But Smith said: "The American people simply won't support an increase in the nation's debt limit unless it is accompanied by real spending cuts and reforms."

As U.S. government debt races toward the $16.4 trillion limit, both parties are looking at their options for dealing with the problem. Here are some of them:

- The Wall Street Journal speculated that monthly debt ceiling increases could be the best Congress can agree to. That is a solution that likely would give the Treasury a gigantic headache in managing the debt;

- Democrats, according to a Senate Democratic aide, are weighing whether to bring back a mechanism that McConnell devised for 2011 and 2012: Giving Obama the power to raise the debt ceiling. If a super-majority of Congress voted against the move, it could stop it;

- Obama has rejected the idea in the past, but some Democrats nonetheless are considering using the 14th Amendment to the U.S. Constitution as a way out. It states that the "validity of the public debt ... shall not be questioned." So, they reason, Obama on his own authority could raise the debt limit. This could stir up a huge legal fight that likely would unsettle financial markets.

- Minting a $1 trillion platinum coin. It's an oddball idea, but there has been some discussion of Treasury using the coin to back additional borrowing;

- A legal scholars' solution: The Senate Democratic aide said some are wondering whether a determination could be made that appropriations bills enacted to provide government funding would supersede the debt limit law, implicitly allowing continued borrowing.

Amid the warnings against a default, some Republican lawmakers nonetheless argue that now is the time to take a stand on the debt limit.

If Obama is unwilling to reduce spending, Senator Jeff Sessions of Alabama told Reuters, "Republicans should use, will have to use, for the sake of the country, any leverage they have to accomplish that goal. And the debt ceiling is one of the things that can be effective in helping to reduce spending."

(Additional reporting by David Lawder Editing by Fred Barbash and Eric Walsh)

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