McCarthy Pauses Debt-Limit Talks as Clock Ticks Down

Debt-limit negotiations hit an impasse Friday as House Speaker Kevin McCarthy blamed the White House for resisting spending cuts, casting doubt on efforts in Washington to avert a catastrophic default.

McCarthy spoke shortly after his hand-picked negotiators abruptly walked out of talks with White House officials, a reversal from the Republican leader's optimistic view that an deal could be reached as soon as the weekend.

The setback weighed on Wall Street where shares slid on the news.

"We've got to get movement by the White House and we don't have any movement," McCarthy, who was not in the meeting, said. "So yeah, we've got to pause."

There was not a dramatic flare-up in the room before negotiators left, according to one person familiar with the negotiations. Another person familiar with the talks said it wasn't a specific issue but ranged broadly across GOP budget-cutting demands.

"Look, they're just unreasonable," Republican negotiator Representative Garret Graves said, moments after he walked out of the session. Graves' comments came a day after McCarthy said he could see a deal coming together with a House vote next week.

Market Impact

McCarthy's uncharacteristically upbeat comments Thursday on the prospects for an agreement on the U.S. borrowing limit sent stocks upward, with the S&P 500 hitting a nine-month high, closing just shy of 4,200.

Treasury Secretary Janet Yellen has signaled a default could become a risk as soon as June 1.

But news of the breakdown on Friday triggered a slump in stocks, with the S&P 500 at one point losing almost 0.8% from its high of Friday's session, though the decline moderated later.

The index was down 0.1% as of 12:58 p.m. in New York. Yields on US Treasury bills that mature in early June resumed climbing Friday, showcasing concerns about potential payment-default risks.

Past debt-limit showdowns have featured similar breaks in negotiations, and some observers were anticipating such a development in the current battle.

Tobin Marcus at Evercore ISI wrote to clients on Thursday saying, "We caution investors not to overestimate how quick or smooth the path to the finish line will be."

Deep Divisions

White House aides told Republicans that just as there were proposals that the House speaker had explained would prompt too many members of his party to defect – like raising additional revenues through closing tax loopholes – there were policies that the GOP side was pursuing that would lead to mass Democratic defections.

Graves said he did not know if the negotiators would meet again Friday or over the weekend. A White House official acknowledged differences between the two parties and said talks will be difficult but said a deal is still possible.

"Unless they are willing to have reasonable conversations about how you can actually move forward and do the right thing, we're not going to sit here and talk to ourselves," Graves said, as House Financial Services Committee Chairman Patrick McHenry stood near him.

The conservative House Freedom Caucus on Thursday called for an end to bipartisan debt-limit talks, insisting instead that the Senate vote on the House Republican bill passed in April with sharp spending cuts across the board.

Progressive Democrats mounted a fervent campaign opposing potential concessions to Republicans, including expanded work requirements to be applied to food stamps, welfare and Medicaid.

Market participants have warned of a surge in borrowing costs and blow to equities in the event of any default, with reverberations to the global economy that could rival the 2008 crash.

Republicans have been pressing for sweeping spending cuts, along with regulatory changes that Democrats have opposed. The months-long impasse between the two sides since the Treasury hit the debt limit in January has prompted increasing warnings from economists of a damaging recession if the brinkmanship continues to escalate.

–With assistance from Jennifer Jacobs, Alex Tanzi, Erik Wasson and Justin Sink.

(Image: Bloomberg)