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U.S. debt limit gathers rust as political budget leverage tool

Pedestrians walk past the U.S. Capitol building prior to U.S. President Barack Obama's State of the Union address in front of the U.S. Congr
Pedestrians walk past the U.S. Capitol building prior to U.S. President Barack Obama's State of the Union address in front of the U.S. Congr

By David Lawder

WASHINGTON (Reuters) - The U.S. debt limit suddenly looks a lot less threatening as Republicans in the House of Representatives struggle to choose from a diminishing list of minor conditions for an increase needed by the end of this month.

Both House Republican leadership and some of the conservatives who voted against the deal to end a government shutdown last October are taking a more pragmatic approach that includes no talk of brinkmanship. As a result, financial markets are far from panicking.

The conditions under discussion by Republicans were shrinking in scale on Thursday after party leaders opted not to attach changes to "Obamacare" insurance provisions nor approval of the Canada-to-Texas Keystone XL oil pipeline.

Republican lawmakers and aides said possible debt limit conditions still under discussion included the restoration of military pension cuts that many Republicans had just supported in December, as well as adjustments to doctor payment rates in the Medicare health care program for the elderly.

These would be a far cry from Republicans' ambitious demands for trillions of dollars in spending cuts in 2011 during a bitter debt limit fight that brought the United States to the brink of default.

House Speaker John Boehner said no decisions had been made on whether to attach any conditions to an increase in the $17 trillion borrowing cap. But he repeated what has become a new mantra on the issue: "We do not want to default on our debt and we're not going to default on our debt."

It remained unclear how he will come up with conditions that Democrats can accept or engineer House passage of the "clean" increase sought by President Barack Obama.

"The Republicans have been negotiating with themselves, and the demands keep getting smaller," said Jim Kessler, a co-founder of Third Way, a centrist think tank in Washington. "They are trying to find some face-saving gimmick rather than something with real substance."

He said the Democrats who control the Senate are likely to reject any substantial conditions and send back a straight increase, putting Republicans in the position of capitulating or holding out and risking market turmoil and a potential voter backlash in November mid-term elections.

Time is running short. A temporary extension of the debt limit nominally expires on Friday and the Treasury has said it expects to exhaust all remaining borrowing capacity by the end of February.

Expressing frustration at Boehner's indecision, Democratic Senator Patty Murray on Thursday accused Republicans of "just throwing ideas against the wall to see what sticks and creating more uncertainty."

Some Republican lawmakers have advocated sitting out this debt limit round and allowing an increase to be passed with Democratic votes only. Raul Labrador, an Idaho Republican backed by the conservative Tea Party movement said that would be better than making some half-hearted demands likely to fail.

"The Democrats can own it," said Labrador, who voted against the shutdown deal, which also extended U.S. borrowing authority.

Such a move could be accomplished by a significant number of the majority Republicans voting "present," which would exclude their votes from the majority needed for passage.

Democrats would happily push a clean increase into passage, said Representative Steny Hoyer, the No. 2 House Democrat, who said he could easily deliver more than 180 "yes" votes towards a 218 majority.

BACK IN THE (DEBT LIMIT) DAY

The 2011 budget fight is viewed by many Republicans as their finest debt-limit hour because it led to the Budget Control Act, which cut discretionary spending by about $2.1 trillion over 10 years, including the painful, across-the-board cuts known as "sequestration."

But the episode also cost the United States its top-tier credit rating from Standard & Poor's and caused widespread financial market turmoil as investors feared a first-ever default on U.S. debt.

Another debt limit increase that was needed in mid-October last year was hijacked the government shutdown on October 1, a fight that was waged over conservative demands to deny funds to President Barack Obama's signature health insurance reform law.

Investors and the public conflated the two events, and Republicans never got an opportunity to use the debt limit to make coherent demands for deficit reduction.

The shutdown paved the way for a modest compromise to set spending levels for government agencies and the military through September 2015, and the debt limit rhetoric has since cooled.

Financial markets are also somewhat more sanguine. Interest rates on one-month Treasury bills are somewhat elevated, but not to the extent they were last October.

And Moody's Investors Service said this week that failure to raise the debt limit by March or April would not lead to a U.S. credit downgrade because the government could more easily cut other expenses to maintain debt payments.

Steven Hess, Moody's lead U.S. sovereign credit analyst said he nonetheless expected Congress to pass a borrowing cap increase "certainly during the month of February."

Some House conservatives who fought hard last year over the government shutdown say they won't give up their desire to use the debt limit to reduce deficits, but they are taking a more pragmatic approach this year.

Representative Rob Woodall of Georgia said he doesn't think House Republicans want to try to "bulldoze" their demands on Senate Democrats and the White House.

"I don't think that's where folks are, I don't think we have the votes to get that done," said Woodall, first elected in the Tea Party wave of 2010. "What we're trying to do is coalesce around something that the Senate would be an enthusiastic partner on."

Woodall voted against the deal last to end the October shutdown and in 2011 declared that "the days of blindly increasing the debt limit without spending cuts are over."

(Additional reporting by Susan Cornwell and Richard Cowan in Washington and Luciana Lopez in New York; Editing by Eric Walsh)

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