WRAPUP 9-US seeks elusive compromise to escape debt debacle

Wed Jul 27, 2011 9:27pm EDT

* Congressional leaders talk behind scenes about options

* Markets still expect late deal but nerves apparent

* Reid says could incorporate parts of Boehner plan

* World leery of impact of U.S. default, credit downgrade (Adds Treasury contingency plan, 53 senators to vote against Boehner bill, Obama's unilateral options)

By Richard Cowan and Andy Sullivan

WASHINGTON, July 27 (Reuters) - Top Republicans and Democrats worked behind the scenes on Wednesday on a compromise to avert a crippling U.S. default, looking to salvage a last-minute deal from rival debt plans that have little chance of winning congressional approval on their own.

With financial markets increasingly on edge, the White House said it saw no alternative to striking a deal to raise the government's borrowing limit by an Aug. 2 deadline to allow the world's largest economy to keep paying all of its bills.

"People keep looking for off-ramps. They don't exist," White House spokesman Jay Carney told reporters, saying the government would be "running on fumes" after the deadline unless the limit was raised.

Even if a deal is reached to lift the $14.3 trillion debt ceiling, a budget plan that flinches from hefty cuts in the deficit may result in a downgrade of the top-notch U.S. credit rating. This would push up U.S. borrowing costs and rattle global investors.

The faltering moves to break the deadlock are weighing on markets. Along with the uncertainty, Wall Street was hit by weak earnings and lackluster economic data, suffering its worst day in eight weeks. [ID:nN1E76Q1Z8]

"The market is beginning to show real concerns in terms of a default. I don't think it's going to happen ... (but) are we headed for a downgrade? That is becoming more of a possibility as each day goes by," said Peter Cardillo, chief market economist at Avalon Partners in New York.

The U.S. dollar rebounded after a sell-off this week but policy makers in countries from Japan to France fretted over how a crisis of confidence in U.S. solvency could spill into the international economy.

Worried investors shifted funds into gold and the Swiss franc, traditional safe havens that both rose to record highs in dollar terms.

The U.S. Treasury will lay out a plan in the next few days for how the government will operate if the Aug. 2 deadline is missed. [ID:nN1E76Q242]

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Full coverage of U.S. budget and debt [ID:nUSBUDGET]

ANALYSIS-US may enter age of deadlock [ID:nN1E76Q18F]

BREAKINGVIEWS-Investors too complacent [ID:nN1E76Q0EQ]

Graphics package r.reuters.com/nud82s

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Leaders in the Republican-controlled House of Representatives and Democratic-controlled Senate scrambled to find common ground but complications with their competing plans could send attempts at a compromise right down to the wire.

"You're going to have to make sure that you can have a spending cut package that can pass both chambers -- there's going to be some work to do there," senior White House adviser David Plouffe said on the PBS show "NewsHour."

Senate Democratic Leader Harry Reid, House Speaker John Boehner, the top Republican in Congress, and Senate Republican Leader Mitch McConnell have been talking about how to break the impasse, several lawmakers said.

President Barack Obama, a Democrat, opposes the two-step Boehner plan because it would extend borrowing authority only temporarily, risking a rerun of the standoff in the run-up to the November 2012 election when Obama will seek a second term.

"GET YOUR ASS IN LINE"

Boehner, facing a mutiny by Republican lawmakers aligned with the fiscally conservative Tea Party movement, has been feverishly canvassing support for a vote on Thursday on his reworked deficit reduction bill. It is expected to be close.

At a morning meeting, he appeared to be firming up support from several wavering lawmakers as he told them to "get your ass in line" behind what he has described as the best chance to win the deep spending cuts that Republicans seek.

Reid says Boehner's plan would be "dead on arrival" in the 100-seat Senate. On Wednesday, 53 senators -- all 51 Democrats and the two independents who usually vote with them -- signed a letter to Boehner saying they would not back his bill.

But Boehner's negotiating position could be strengthened if his measure gets the 217 votes needed in the House. If it fails, Boehner would be weakened and his job may be on the line. [ID:nN1E76Q1PW]

Senate Democratic aides said they hoped support would grow for Reid's one-step remedy, which Obama backs, if Boehner's plan is killed, either by the House or Senate.

If Congress does not increase the debt limit, the United States could eventually suffer its first full government default. That could put its faltering economic recovery into reverse and send shock waves through the global economy.

Analysts expressed confidence a compromise can be reached.

"We continue to believe it is overwhelmingly likely that a debt deal is passed without a crisis," Eurasia Group said in a briefing note. "The two sides have furnished proposals that significantly overlap and leave room for compromise."

Reid said he could easily modify his own bill to incorporate elements of Boehner's bill in a way that could win support from both parties in the Senate. This would improve the chances for a compromise that has so far been elusive.

"There will be sufficient cooperation so a bill will pass that allows the debt limit to be lifted, with deficit reduction," Democratic Senator Max Baucus said.

Both sides acknowledge similarities between their plans.

Reid's measure has a concession aimed at winning Republican support -- no tax increases. It also cuts more spending than Boehner's proposal, according to an independent assessment.

Tea Party groups have called on Republican lawmakers to reject any compromise, including the Boehner plan.

A Tea Party rally outside the Capitol in Washington drew about 40 participants, including presidential candidate Herman Cain, who urged Republican leaders to "hold the line" in demanding spending cuts and opposing tax increases.

"Government's too big. That's what this is about," said one protester, Kathy Smith from Fairfax, Virginia.

WORLD "NEEDS" U.S. DEBT DEAL

Boehner rushed to revise his two-step proposal after an analysis by the non-partisan Congressional Budget Office found it would cut spending by $350 billion less than the $1.2 trillion over 10 years he had claimed.

His new plan, which may make it easier for him to obtain backing from fiscal conservatives, reduces the debt ceiling increase to a maximum of $900 billion, covering the nation's borrowing needs until about November. A technical tweak boosts the projected spending cuts to $917 billion.

Some analysts say the government may have enough cash on hand to pay bills until the middle of the month but the Obama administration says the Aug. 2 deadline is unavoidable.

Several House Democrats planned a news conference for Thursday to urge Obama to invoke an obscure clause of the U.S. Constitution to raise the debt ceiling on his own if needed.

The White House has dismissed this idea of using the 14th Amendment but Obama has a range of unilateral options he can take. [ID:nN1E76O0QG]

"A default or downgrade on U.S. debt would cause considerable problems for Japan's financial system," said Hidetoshi Kamezaki, a board member of the Bank of Japan. [ID:nT9E7IC027]

France's budget minister, Valerie Pecresse, urged Washington to come to an agreement.

"The global economy needs an American agreement," Pecresse said. [ID:nP6E7I103Y] (Additional reporting by Deborah Charles, Andy Sullivan, Kim Dixon, Dave Clarke, Lily Kuo, Donna Smith, Alister Bull, Caren Bohan, Tabassum Zakaria and Laura MacInnis; writing by Matt Spetalnick and Pascal Fletcher; Editing by John O'Callaghan)

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