Rubin to juggle books to avoid default Accord on budget seems distant; federal shutdown looms


WASHINGTON -- Treasury Secretary Robert E. Rubin indicated yesterday that he was preparing to carry out a costly emergency plan to forestall a national default at midweek by juggling the federal government's books to pay investors.

Mr. Rubin's comments came as House Speaker Newt Gingrich forwarded to President Clinton a bill passed by Congress on Friday to raise the debt ceiling temporarily, a bill that is laden with restrictions on the Treasury's ability to use its small arsenal of weapons to avoid default.

Mr. Clinton has vowed to veto the measure, probably today, because he views it as an effort by congressional Republicans to corner him into signing their version of the federal budget or being forced into default next month.

The positions of the Republican majority in Congress and the White House continued to harden yesterday, with only a few glimmers of possible compromise.

The government seems almost certain to begin a partial shutdown tomorrow morning as the Republicans and the administration spent the weekend dueling on talk shows and at news conferences and rejecting each other's preconditions for an Oval Office meeting to work out their differences.

While a government shutdown would have ramifications for federal services around the country, administration officials are increasingly focused on the risks of a default, which could reverberate in markets around the world.

Mr. Rubin's emergency plan, which could kick into action as early as today, involves "disinvestments" from two huge government-administered retirement funds and other steps that Mr. Rubin himself said several weeks ago "raise serious, unresolved legal and practical issues."

Mr. Rubin is clearly walking a fine line, hoping to scare Congress into action but to avoid shaking the markets. The signal that an imminent default could be forestalled seemed to be part of that balancing act.

Mr. Rubin's decision comes as he and the Republican majority have sketched out wildly different scenarios of how the bond and stock markets might react to the threat of default. The Treasury secretary, a former co-chairman of Goldman, Sachs & Co., has warned for weeks that Americans would pay for a default "for years and years to come," in the form of higher interest rates that borrowers would charge to the United States because of the increased risk that repayment would not come on time.

His position seemed bolstered late Friday when a leading credit-rating agency, Standard & Poor's, warned that the United States could lose its triple-A credit rating because of investor concerns that debt payments would be held hostage to political arguments over the budget.

Even an increase of only a half a percentage point on the rates the government pays could cost the United States $25 billion more a year and increase the cost for homeowners holding variable-rate mortgages. The Clinton administration is betting that angry voters would blame the Republicans for those higher payments. A surge in interest rates would also clobber investors holding existing Treasury bonds, because the price of those securities would tumble.

Mr. Gingrich and a number of leading Republican financiers disagree. They insist that Mr. Rubin is deliberately trying to scare the markets. And they say that the markets will yawn rather than panic, viewing a federal default as just another part of Washington's politics as Congress and the White House argue over budget priorities. If the result of that argument is a commitment to faster deficit reduction, they contend, interest rates will be driven lower.

"This whole idea that there would be a permanent rise in interest rates is nonsense," Stanley Druckenmiller, managing director of the Soros Fund, said during a visit to Washington to brief Mr. Gingrich. "Today, we buy Argentinian and Brazilian debt," he said, naming two countries that were in desperate financial shape a decade ago.

But the immediate question is whether Mr. Gingrich, Senate Majority Leader Bob Dole and their allies would test the theory in real life. If they are wrong and the markets go haywire in coming weeks, it could derail both their budget battle and Mr. Dole's run for the presidency.

Mr. Dole seemed to be signaling how uneasy he was yesterday when he said that if Mr. Clinton would simply agree to a balanced budget in seven years, "we'll take off the extraneous" restrictions on the temporary debt-ceiling increase.

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