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Senate leaders within striking distance of shutdown deal

In a long-awaited breakthrough, Senate leaders closed in on a deal yesterday to raise the federal debt ceiling and end a two-week-old government shutdown as Washington scrambled to avoid the nation’s first default on its debt.

With leaders of both parties optimistic that they will soon come together to end the political crisis that has paralyzed Washington, details of the possible agreement began to emerge. It would raise the debt limit until Feb. 15 and fund federal agencies until Jan. 15, with the two sides holding budget talks before a new round of sequestration budget cuts take effect in January, according to people in the Senate familiar with the talks.

The deal would also make minor tweaks to the new health care law, though nothing along the lines of what some conservative Republicans have been demanding. It would require additional safeguards to ensure that people who receive federal subsidies to purchase health insurance under the law are eligible to receive them, the people said.

In exchange for meeting that Republican condition, Democrats are seeking a delay of the law’s so-called “belly button tax” –- a tax on existing policies that is set to add roughly $63 per covered person – including spouses and dependents – to the cost of health insurance next year. Under the emerging agreement, the tax would be delayed until 2015, sparing organized labor as well as major employers, the people said.

Negotiators, meanwhile, rejected a Republican proposal to delay a controversial 2.3 percent tax on medical devices that is also part of the Affordable Care Act.

With the talks continuing, Senate Majority Leader Harry Reid, a Nevada Democrat, recessed the Senate for the day, and said that he and Senate Minority Leader Mitch McConnell, a Kentucky Republican, had made “tremendous progress . . . but we are not there yet.”

McConnell echoed Reid’s remarks. “We’ve had a good day,” he said. “I think it’s safe to say we’ve made substantial progress, and we look forward to making more progress in the near future.”

Earlier, the Senate talks had been far enough along that the White House postponed a 3 p.m. meeting with Democratic and Republican leaders of the House and Senate to allow the negotiations to proceed. No new time or date for the meeting was immediately announced.

As the Senate convened for the day, Reid had said on the floor that he was “very optimistic” about what he called the “constructive, good-faith negotiations” aimed at avoiding the nation’s first debt default. McConnell said he expected that “we’re going to get a result that will be acceptable to both sides.”

It was not immediately clear whether any agreement would be able to win support in the Republican-led House, though a bipartisan deal would put immediate pressure on House Speaker John Boehner, an Ohio Republican. Asked whether the emerging Reid-McConnell framework was something Boehner could accept, Sen. Amy Klobuchar, a Minnesota Democrat, told reporters: “One thing at a time.”

Boehner huddled with McConnell in McConnell’s office yesterday afternoon. Michael Steel, a spokesman for Boehner, declined to weigh in on specifics, saying only that the Speaker “went to get an update on the discussions.”

As talks intensified, the president warned that if the standoff is not resolved by Thursday’s deadline to raise the debt ceiling, “we stand a good chance of defaulting.”

A bipartisan group of senators organized by Sen. Susan Collins, a Maine Republican, also met for two hours yesterday morning. After briefing McConnell, Collins said the group was making progress but that the higher-level talks between Reid and McConnell were more significant in finding a way to resolve the standoff.

U.S. financial markets fell slightly in morning trading but then seemed to stabilize. The Standard & Poor’s 500 index and the Dow Jones industrial average each dropped about 0.5 percent in the first 90 minutes of trading, then regained about half that amount. In a more telling sign of market sentiment, the VIX, a measure of expected future volatility in stock markets, soared 12.4 percent, but the increase then declined to eight percent.

Bond markets were closed for the Columbus Day holiday. But in recent days investors have sold off short-term Treasury bills maturing later in October, fearful that there could be disruptions that prevent the government from making good on its obligations.

The entrenched dispute over government spending began with a battle over whether to link funding for the basic operations to changes in President Obama’s signature Affordable Care Act. It morphed last week into a fight over extending the debt ceiling, which is the government’s ability to borrow money to pay for bills it has incurred.

Two weeks into the federal government shutdown, with the possibility of an U.S. default looming, the disagreement has expanded to include the issue of broader cuts in existing programs and changes to the mandatory curbs in spending known as the sequester.

“I’m ashamed, and I want to apologize to the American people,” Sen. Joe Manchin, a Wester Virginia Democrat, told CNN’s New Day, describing Congress’s seeming inability to forge an agreement. “This is not what I signed up for.”

The plan being cobbled together by Collins’s group focused on ending the shutdown and raising the $16.7 trillion debt limit. But Senate Democrats, emboldened by deep divisions among House Republicans and poll data showing the GOP bearing the brunt of the blame for the impasse, rejected the initial proposal because it would allow a new round of sequester cuts to take effect in January.

Reid instead is seeking a quicker deadline on a temporary measure to fund federal agencies and reopen the government, and a longer deadline for raising the debt limit. “The plan would be, open up the government immediately for a period of time before the sequester hits (on Jan. 15) and then have serious discussions where we might be able to undo the sequester,” Sen. Charles Schumer of New York, the No. 3 Democrat in the Senate, said Sunday on CBS’s Face the Nation.

Schumer noted that House Republicans had already offered to roll back the sequester cuts in a proposal that the White House rejected Friday. That plan would have immediately suspended enforcement of the debt limit and reopened the government in exchange for a plan to replace sequester savings in 2014 (and perhaps longer) with reductions to Social Security and Medicare proposed in Obama’s budget.

“That was one place where the House Republicans and the president were not, you know, at total loggerheads,” Schumer said, suggesting that a deal could be cut if Republicans would consider new revenue along with cuts to entitlement programs.

The sequester cuts are part of $2.1 trillion in agency spending cuts over 10 years included in the Budget Control Act, the measure that raised the debt limit in 2011. Initially, Republicans, too, wanted to replace the sequester, particularly the portion that falls on the Pentagon. But since Obama won tax hikes on the wealthy as part of a year-end fight over the “fiscal cliff,” McConnell has taken to casting the sequester as a significant GOP victory from which the party cannot retreat.

Treasury Secretary Jack Lew has said that if Congress fails to lift the debt limit, he will exhaust his borrowing authority Thursday. At that point, he will have to rely on a cash balance of about $30 billion and incoming revenue to pay the nation’s bills.

Independent analysts say Lew will not begin missing payments immediately but will begin to run short of funds no later than Nov. 1, when nearly $60 billion is due to Social Security recipients, Medicare providers, active-duty military service members and civil-service retirees.

Investors are next due to collect interest on Treasury bonds – perhaps the most important payments from the perspective of global markets – Oct. 31.

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