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Saturday, July 30, 2011

Democrats try to break U.S. debt impasse, Posted by Meosha Eaton

(Reuters) - Senate Democrats aimed to seize the initiative in efforts to head off a ruinous U.S. debt default by pushing their deficit-cutting plan on Saturday towards a possible compromise with a divided Republican Party.

Entrenched differences were still hampering a compromise as Democratic leaders accused their Republican counterparts of obstructionism, less than 100 hours before the government says it will run out of money to pay all its bills.

Democrat President Barack Obama used his presidential pulpit for the second time this week to urge rival lawmakers to strike a deal and avert what he has said would be an "inexcusable" default.

"There are multiple ways to resolve this problem," Obama said in his weekly address. "Congress must find common ground on a plan that can get support from both parties in the House. And it's got to be a plan that I can sign by Tuesday."

The debt saga shifted to the Senate late on Friday after the Republican-controlled House of Representatives passed a deficit-cutting bill, breaking weeks of political inertia.

The Democratic-controlled Senate quickly killed that bill, as expected, but its earlier approval by the House lifted hopes that it could form part of a final compromise.

The mood in the Senate quickly soured, however, as Democratic leaders angrily accused Senate Republican Leader Mitch McConnell of refusing to talk to them.

Senate Democratic Leader Harry Reid modified his plan, taking elements of an earlier McConnell proposal with the hopes of picking up Republican votes.

But he declined McConnell's offer to vote on it immediately -- a sign that Reid does not yet have enough support.

The Senate now is expected to hold that vote early Sunday morning, setting up final passage on Monday morning, shortly before U.S. financial markets open.

The House has scheduled a vote for around 2 p.m. EDT (7:00 p.m. British time) Saturday on a version of Reid's plan.

The government could run out of money to pay all its bills on Tuesday unless Congress agrees to raise the $14.3 trillion (8.70 trillion pounds) debt ceiling.

"The country's in crisis. This is not a time for politics as usual," Democratic Senator Charles Schumer told a news conference.


Despite the harsh rhetoric, there are hopes that back-channel talks will yield a compromise over the weekend. Democrats say many rank-and-file Republicans are willing to compromise even if McConnell isn't.

McConnell wants to make sure the White House is involved to assure that any final package will make it past Obama's desk, Republican aides said.

"We are headed for a debt ceiling extension," said David Kotok, chairman and chief investment officer at Cumberland Advisors in Sarasota, Florida. "The risk is that some accident causes actual default. It's not likely but possible."

Investors and foreign governments are likely to remain on edge, though, as procedural hurdles will make it hard for Congress to send a deal to Obama until Monday night.

Reid's revised proposal, which would cut $2.2 trillion over 10 years, incorporates parts of a "backup plan" first proposed by McConnell. The new version would essentially give Obama the authority to raise the debt ceiling in three stages to cover U.S. borrowing needs through the 2012 elections when he is running for a second term.

Obama and his Democrats had hoped to avoid multiple votes before the election.

The world has watched in growing alarm as political gridlock in Washington has brought the world's largest economy close to an unprecedented national default, threatening to plunge world markets and economies into turmoil.

U.S. stocks endured their worst week in a year as the uncertainty made investors shy away from riskier assets and the dollar slumped to a record low against the safe-haven Swiss franc. Much worse could be in store if a U.S. debt deal doesn't appear to be on track by the time markets open on Monday.

A late deal also raises the prospect of the United States losing its top-notch AAA credit rating, which could rattle markets and raise borrowing costs for Americans struggling with unemployment above 9 percent.

Obama has rejected suggestions that he could invoke emergency measures to unilaterally raise the debt ceiling in the event the parties fail to bridge their sharp ideological differences over taxes and spending.

With a final deal still in doubt, the government has begun to prepare Wall Street banks for the possible consequences of a default. One of the first casualties could be a planned quarterly sale of $42 billion in new Treasury bonds that might have to be delayed or cancelled.

Some U.S. companies and private equity firms are also hitting the pause button on deals, fearing that a failure to reach a deal could raise financing costs.

"It's definitely having a chilling impact on people's ability to get deals done right now," said one top investment banker who declined to be identified.

(Additional reporting by Michael Erman and David Gaffen in New York; Writing by Stuart Grudgings; Editing by Eric Beech

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