Geithner to GOP: Raise debt limit or 'lights out'

WASHINGTON — Treasury Secretary Timothy Geithner made an appeal Thursday to House Republican freshmen, a group of lawmakers skeptical of his warning that a failure by Congress to raise the nation's borrowing limit would have grim financial and economic consequences.

Geithner came armed with fresh evidence of Wall Street's increasing pessimism over prospects for a quick resolution to the standoff over government debt. Moody's Investors Service, the debt-rating agency, said it would consider downgrading the U.S. credit rating if it did not see progress in negotiations by mid-July.

Moody's had expected "political wrangling" over the issue, the firm said. But it added: "The degree of entrenchment into conflicting positions has exceeded expectations. The heightened polarization over the debt limit has increased the odds of a short-lived default."

The government reached its borrowing limit of nearly $14.3 trillion May 16. Treasury officials have said they can use a series of maneuvers to continue most government functions until early August but would face a default on federal obligations leading to likely economic upheaval.

However, some of the 87 House GOP freshmen, a staunchly conservative and strong-willed group, have publicly questioned Geithner's warnings. Dubbed by some as debt-ceiling "deniers," they doubt a failure to lift the borrowing cap would force a default or lead to unpredictable results in financial markets, as Geithner has argued.

The Moody's warning put pressure on Democrats and Republicans by calling for a deficit-reduction deal as part of the debt-ceiling talks. House Speaker John Boehner, R-Ohio, has said Republicans won't vote to raise the limit until President Obama and Senate Democrats agree to massive spending cuts.

House leaders have quietly assured Wall Street that they intend to raise the limit. Boehner said Wednesday that he believed a deal would be reached within a month.

Rank-and-file Republicans, however, claim Geithner's predictions of economic calamity are an attempt to force GOP leaders to cut a deal. "He just said it will be 'instant lights out' on America, but he didn't give a basis for that," said Rep. Tim Huelskamp, R-Kan., who attended Thursday's meeting.

Lawmakers said they went in hoping Geithner would talk about the administration's long-term plans for deficits. As he left the meeting, Geithner predicted officials would avoid default and would agree this summer on "a long-term fiscal plan."

Geithner called the Moody's report a "warning sign," participants said. Boehner said it was evidence that "the White House needs to get serious" about deficits. Geithner has argued in letters to Boehner and other Republicans that the government is headed for default and is running out of options.

His chief foil in Congress is Republican Sen. Pat Toomey, the Pennsylvania freshman who has promoted the view that, even without a borrowing increase, the Treasury would have enough money to pay the annual interest on debt, roughly $200 billion. That would be adequate to avoid the default, he has said.

Toomey proposed legislation to force the Treasury to first pay U.S. obligations and then use the remainder for other parts of the budget.

The bill has garnered 22 Republican co-sponsors, nearly half the GOP members of the Senate. A House version introduced by Rep. Tom McClintock, R-Calif., has 96 co-sponsors.

The show of support reflects public opposition to raising the limit and shows the effect of persistent pressure from outside Congress, where tea-party conservatives want to force the government to begin living within its means immediately.

Doing so would require government spending to drop by one-third — greater than $1 trillion, or roughly the cost of Social Security and Medicare — virtually overnight.

Geithner has rejected this approach, telling Toomey this year that global markets would not be satisfied if the country solely made interest payments on its debt.

Los Angeles Times staff writer Jim Puzzanghera and Tribune Washington Bureau staff writer Lisa Mascaro contributed to this report.