Raising the debt limit by a 'little'

NEW YORK (CNNMoney.com) -- Last week, there was talk on Capitol Hill of raising the legal limit on how much debt the U.S. Treasury could have on the books by as much as $1.9 trillion. This week, the tune has changed considerably.

The new plan under consideration: increase the debt ceiling just enough to satisfy Treasury's borrowing needs for two months -- likely by "a couple hundred billion dollars," House Majority Leader Steny Hoyer, D-Md., told reporters Tuesday.

The change came about because of pressure brought by fiscal hawks in the both the House and the Senate, who have threatened to vote against a much-larger debt ceiling increase unless they get various commitments to increase fiscal responsibility in the legislation.

The Democratic leadership would prefer to pass a large increase to the debt ceiling to carry Treasury through all of next year in order to avoid another vote on the issue before the mid-term elections in November. Currently, the debt ceiling is set at $12.104 trillion, and as of Monday, the amount of debt on Treasury's books was $12.026 trillion. (See correction.)

But House and Senate leaders can't ignore the fiscal hawks, since they need every vote they can get.

"It's all on the shoulders of leadership. They're responsible for making sure we don't default," said Charles Konigsberg, chief budget counsel of the Concord Coalition, a deficit watchdog group.

And if the debt ceiling isn't increased by the end of this year, the nation is likely to default on its debt. That would unleash a chain of events that could devalue U.S. bonds and seriously harm the nation's reputation with creditors around the world. In short, it's not something lawmakers can afford to let happen.

For the fiscal hawks, agreeing to vote for a short-term increase to the ceiling buys them time to negotiate further with the leadership to address their demands, which differ somewhat in the House and the Senate.

Fiscal conservatives in the House, known as Blue Dogs, have said they would vote against a big increase in the ceiling unless the legislation re-enacts so-called pay-go rules, which require lawmakers to pay for any new spending proposals or tax cuts. But that proposal excludes about $3 trillion worth of policies that are likely to be extended, including the Bush tax cuts for the majority of Americans.

That's why the House version of pay-go may be a no-go in the Senate. Senate Budget Chairman Kent Conrad, D-N.D., has said he supports pay-go but not if it exempts pricey policies.

Meanwhile, a bipartisan group of senators says it won't vote for a large debt ceiling increase unless the leadership commits to a "credible process" for reining in the country's debt.

The senators' proposal, similar to one in the House, is to create a bipartisan fiscal commission charged with making recommendations to Congress for reining in runaway spending growth that threatens to overwhelm the federal budget. Lawmakers would be required to vote up or down on the recommendations but would not be allowed to amend or filibuster them.

- CNN's Deirdre Walsh contributed to this report

Correction: The original version of this article included an incorrect total for the outstanding debt subject to the debt limit.