TRG Treasury Fpo

WASHINGTON—Treasury Secretary Jacob Lew on Wednesday expressed concern that "last-minute brinkmanship" in Congress would lead to a legislative "accident" in which lawmakers fail to raise the debt ceiling before a Nov. 3 deadline.

The tight timing is forcing Republican leaders in Congress to search for a way to prevent an unprecedented government default. The Treasury Department says it will be unable to pay the nation's bills in just two weeks.

The standoff is rippling through financial markets as investors this week reduced their exposure to Treasury bills that mature in November, driving yields on such short-term debts to levels last seen two years ago, when Congress went through a similar episode.

The Treasury bumped against the borrowing limit in March and has used emergency steps to free up cash since then.

Raising the debt limit always has been unpopular with the party that doesn't control the White House. The vote has become especially contentious in recent years as conservatives use the issue as leverage to win policy concessions from President Barack Obama. Mr. Obama has said he won't negotiate on the debt limit, a precedent struck during separate standoffs in 2013 and 2014.

But the circumstances this time differ in several important respects.

Republicans find themselves distracted by leadership turmoil after House Speaker John Boehner said he would resign at the end of this month, under pressure from conservative lawmakers.

And Republicans have added to their congressional majorities since 2014, increasing the ranks of lawmakers disinclined to vote in favor of lifting the debt limit.

Assuming every Democrat approves a "clean" debt-limit increase that doesn't include spending cuts or other caveats, some 30 House Republicans' votes would be needed to pass the bill. Last year, the measure attracted votes from 28 House Republicans. Of those, nine have left Congress.

GOP aides are nervous about finding the necessary votes this time, but lawmakers say they are confident the House will ultimately find a way to raise the debt ceiling. Resolving the issue is at the top of Mr. Boehner's list before he leaves Congress, a senior House GOP aide said Wednesday.

Raising the debt limit doesn't authorize spending on new government programs. It allows the government to pay debts for items where Congress already approved spending.

"I view not defaulting on our obligation as one of the single most important things that one must do in Congress," said Rep. Ryan Costello, a freshman Republican from Pennsylvania. Mr. Costello said that while he would like to see spending reductions paired with any debt-ceiling increase, the Senate and Mr. Obama are likely to block such demands. "We're going to have to have a backup strategy," he said. "The reality is you can't default. That money's been spent."

House Republicans will make the first move, likely passing at week's end legislation including a host of GOP demands that Democrats will block in the Senate. As the standoff approaches the Nov. 3 deadline, GOP leaders will likely have to turn to their least appealing option: relying on Democratic votes to increase the debt limit without any policy concessions.

In their first concrete proposal this week, House Republicans offered a package that would raise the debt limit to $19.6 trillion from its current level of $18.1 trillion while enacting large cuts to spending on safety-net programs that they proposed in their budget this spring. It would also force a vote on a balanced-budget pact, among other changes to the budget process.

"This forces Congress to do its job and take those transformational budgets and put them into action," said Rep. Bill Flores (R., Texas).

It is unlikely to advance in the Senate, where Republicans control 54 seats but need 60 votes to overcome procedural hurdles.

Some Republicans also oppose it, a sign of the potentially chaotic endgame. The GOP bill is "clearly going nowhere," said Rep. Tom Reed (R., N.Y.). He said he doesn't like the proposal because it was sprung on members at the last second and short circuits budget-process overhauls that are already in the works.

House Republicans on Wednesday voted to pass a separate bill that would allow the Treasury to pay interest to bondholders and Social Security payments without an increase in the debt limit. It also isn't expected to advance in the Senate.

The Treasury called the plan "default by another name" last week because it would delay payments—in violation of federal law—to a broad swath of government operations, including federal workers, contractors and soldiers, once the government runs out of cash.

"The basic political math suggests that Republicans have no good options other than raising the debt ceiling," said Brian Gardner, a political analyst at investment bank Keefe, Bruyette & Woods Inc. The debt prioritization bill is a "political disaster" that exposes Republicans to claims that they "put Chinese bondholders ahead of U.S. veterans," he said.

Reduced demand for U.S. securities that results from debt-limit standoffs costs the government money. In 2011, uncertainty about raising the debt limit cost the government around $1.3 billion, according to a study by the Government Accountability Office, an independent investigative arm of Congress.

Many of the worst fears from past debt-limit standoffs haven't been realized. Deficits have declined in part because of ultralow borrowing costs and the U.S. economic recovery, while frustrating, has nevertheless become the envy of many rich nations. The Treasury said last week the U.S. budget deficit in the year ended Sept. 30 fell to its lowest level since 2007.

Siobhan Hughes and Richard Rubin contributed to this article.

Write to Nick Timiraos at nick.timiraos@wsj.com and Kristina Peterson at kristina.peterson@wsj.com

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(END) Dow Jones Newswires

October 21, 2015 21:05 ET (01:05 GMT)

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