Q+A: State of play in the debt and deficit talks

WASHINGTON (Reuters) - Seeking to break a standoff over raising the debt limit, a group of lawmakers led by Vice President Joe Biden meets three times this week as a critical deadline to reach a deal fast approaches.

After six meetings, some progress has been made but there is still deep disagreement on taxes and healthcare and a growing sense of urgency that the group must achieve much more soon if the United States is to avoid the first debt default in its history.

If the Biden group, which includes senior Senate and House of Representatives members, can reach a deal on cutting the deficit, expected to reach $1.4 trillion this year, it could give lawmakers political cover to vote in favor of raising the $14.3 trillion limit on U.S. government borrowing.

Treasury Secretary Timothy Geithner has warned that if Congress does not raise the debt limit by August 2, the United States could default with dire economic consequences.

WHAT IS THE STATUS OF THE BIDEN TALKS?

The seven-member panel of Republicans and Democrats are now tackling the thorniest issues of tax increases and health care and pension cuts, but a deal seems far from reach.

After the sixth session last week, the Republican participants were still refusing to consider tax increases as part of a deficit reduction deal -- something that Biden insists must be on the table.

Aides said the talks had entered difficult terrain and that a fundamental stumbling block remained: Democrats will not consider major cuts to health benefits, such as the Medicare health program for the elderly, until Republicans consider tax increases -- something they insist are "off the table."

The stakes were raised further after a third ratings agency warned it would consider cutting the United States's top-notch credit rating if substantial progress toward a debt limit deal is not made soon.

Further pressure emerged last week with the release of weak economic data that showed a slowdown in manufacturing and stubbornly high unemployment. Both sides are using the disappointing numbers to bolster their own arguments.

For the first time, President Barack Obama and John Boehner, the top Republican in the House of Representatives, are getting involved. They will play golf together on Saturday and the debt limit issue will be discussed.

WHERE ARE THEY LOOKING FOR CUTS?

With little time to craft a deficit-reduction package, the Biden group is trying to identify obvious areas of agreement. Rather than come up with its own plan, the group is looking to "mix and match" from existing proposals.

These include President Barack Obama's revised fiscal 2012 budget proposal, the House Republican budget plan, a House Democratic alternative, a report by Obama's deficit-reduction commission and an array of other governmental and non-governmental reports.

Some likely areas of agreement: reduce farm subsidies, require federal workers to contribute more to their pension plans, cap annual spending, sell excess federal property, reduce Medicare fraud and overpayments, and auction broadcast spectrum licenses.

The group has only agreed on about $150 billion in spending cuts so far, even though Republicans demand "trillions" in cuts before they agree to a deal to raise the debt limit. The debt limit will need to be raised by about $2.4 trillion to meet the government's borrowing requirements through next year's presidential election.

WHAT HOPES ARE THERE FOR A DEAL?

The greatest hope for a deal lies in the fact the White House and Republican and Democratic leaders all agree that the debt limit needs to be raised by the August 2 deadline.

Exactly how the Biden group gets to a deal remains unclear. Biden himself has said he is not sure if the group can get to the "finish line," but members appear to agree there is not enough time before August 2 to come up with a comprehensive deficit-reduction plan.

Eric Cantor, a senior Republican congressman in the talks, now says that while the Biden group is laying groundwork for a possible deal, it will take Obama and Boehner to hammer out the final details. A deal could include a cut in employers' payroll taxes to encourage more hiring, a move that Obama floated last week and one that might sweeten the pot for Republicans.

Analysts say the only realistic overall option is to set a deficit-reduction goal of roughly $4 trillion over 10 years, with automatic spending-cut "triggers" that would kick in if the deficit were not being reduced fast enough.

Obama advocates that approach but Boehner rejects it as "gimmicks."

One of the biggest unresolved questions in the negotiations is whether Republicans would accept revenue increases that are not tax rate increases. More than $1 trillion in revenues can be clawed back by eliminating certain tax credits and deductions in the tax code, without having to hike rates. If Republicans agreed in principle to such revenue increases, it could clear the way for a deal.

WILL THE TEA PARTY MOVEMENT BACK A BIDEN DEAL?

Even if the Biden panel reaches a broad deficit deal that avoids, for now, going into detail on taxes and entitlements, it is almost sure to face opposition from dozens of lawmakers aligned with the fiscally conservative Tea Party movement.

Their opposition is bolstered by opinion polls showing most Americans oppose raising the debt limit. Many conservative Republicans do not believe Geithner's August 2 deadline is valid and say his predictions of catastrophe if the borrowing cap is not lifted by then are unfounded.

Boehner likely will need Democratic help to pass any increase in the debt limit to overcome Tea Party opposition.

WHO HAS MORE AT STAKE IN THE TALKS?

There are considerable risks on all sides. If Boehner fails to get a "yes" vote in the House to raise the debt limit, Republicans likely will be blamed for any fallout in the bond markets, and with it a spike in interest rates.

A financial crisis could plunge the United States back into recession. With many Americans already questioning Obama's stewardship of the economy, another downturn would endanger his efforts to seek re-election next year.

ARE THE MARKETS WORRIED?

For now, bond markets are calm. Treasury yields have stayed low, suggesting investors remain comfortable buying U.S. debt, particularly amid weak stock markets. Analysts say few investors envisage Congress failing to raise the borrowing cap, even if it takes weeks of negotiations.

Twelve out of 23 Wall Street bond dealers and fund managers surveyed by Reuters in May said the government had until the end of July before the bond market would start to worry.

(Reporting by Tim Reid; Editing by David Lawder)