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Republicans pass bill to pay bondholders first if debt cap hit

By Rachelle Younglai

WASHINGTON (Reuters) - Republicans in the House of Representatives passed a bill on Thursday, over the threat of a White House veto, that would allow the government to borrow money to pay bondholders and retirees if Congress fails to reach a deal to raise the U.S. debt ceiling.

The legislation is not expected to move forward in the Democratic-controlled Senate, but what is essentially a tactical maneuver will allow the Republicans who control the House to argue they have done their best to avoid a potential credit default and repeat of 2011's debt limit fight.

"Financial markets ought to be confident that their Treasury bonds are safe, regardless of what political storms are raging in Washington," said Republican Representative Tom McClintock of California.

The bill, which passed 221-207 with no Democratic support, would essentially raise the debt ceiling for only two payments: interest and principal on government bonds as well as Social Security retirement benefits. Other government bills would be paid by incoming revenue until there was no more cash remaining.

The White House said it would veto the bill and Democratic lawmakers called it the "pay China first" legislation as the Asian country holds more than $1.2 trillion in U.S. government bonds and is America's largest foreign creditor.

A number of Republicans also opposed the bill and said it would allow the United States to incur more debt - the very problem Republicans say they want to solve.

"It is a debt limit increase, and I think many do not realize that," said Kentucky Representative Thomas Massie, one of eight Republicans who voted against the bill. "Instead of helping to bring the national debt under control, this bill will only make a bad problem worse."

By the end of next week, the Obama administration will no longer be able to borrow money to fund government operations because Congress has only agreed to extend the government's borrowing authority until May 19.

This will force the U.S. Treasury to start using its limited accounting maneuvers to extend its borrowing power. Such measures are not permanent and analysts say they could be exhausted by October.

REPUBLICAN STRATEGY

House Republicans are looking for ways to deal with the debt limit while staying true to House Speaker John Boehner's rule that any debt limit increase be matched by budget cuts and program reforms.

Republicans have been trying to force the administration to slash government spending and change Medicare healthcare and Social Security benefits in return for an increase in the debt ceiling.

They still have time to broker a deal with the White House as the federal government is running a much smaller deficit so far this year. Also, government-controlled Fannie Mae, the biggest U.S. mortgage finance company, said on Thursday it would repay the U.S. Treasury nearly $60 billion, giving the government more revenue.

So far, no deficit reduction deal is in sight. Though some allies of chief Republican tax writer Dave Camp of Michigan have floated the idea of linking a debt-limit increase to a revamp of the income tax code and lower tax rates.

This would allow lawmakers to skirt the politically painful decisions related to the costs of Medicare and Social Security. However, it is unclear if mainstream party supporters, much less the conservative faction of the Republican Party, will go along with this.

"It wouldn't be enough," said Kevin Brady, a Texas Republican, who noted that reform of the Social Security and Medicare benefits programs still would be required.

Camp has been working for more than a year to draft an overhaul of the entire tax code and has vowed repeatedly to move legislation out of his Ways and Means Committee this year.

House Republican are due to hold a meeting next week to discuss the various debt ceiling options.

(Additional reporting by Kim Dixon; Editing by Bill Trott and Jackie Frank)

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