WRAPUP 5-U.S. still in fiscal deadlock, but glimmers of hope emerge
* Obama shows some signs of flexibility
* Senator Portman floats proposal
* Still no sign of a breakthrough
* Stocks and dollar fall
By Richard Cowan and Mark Felsenthal
WASHINGTON, Oct 7 (Reuters) - A few faint glimmers of hope surfaced on Monday in the U.S. fiscal standoff, both in Congress and at the White House, with President Barack Obama saying he would accept a short-term increase in the nation's borrowing authority to avoid a default.
Separately, a Senate aide said Republican Senator Rob Portman, an Ohioan influential on budget issues, was floating a plan to cut federal spending and reform the U.S. tax code as part of a broader deal to reopen shuttered government agencies and raise the government's debt ceiling.
While Portman's initiative may or may not gain traction, most lawmakers believe that a budget deal like it will be necessary to end the stalemate.
Still, seven days into a government shutdown and only 10 days from a critical need to raise the nation's debt limit, nothing amounting to a breakthrough was in sight.
Senate Democrats could introduce a bill to raise the debt limit this week, according to a Democratic aide. Considering the procedural roadblocks the measure could face, aides said they have to get the legislation rolling well before Oct. 17, when Treasury Secretary Jack Lew has said the government will run out of borrowing authority.
It was uncertain whether Democrats can muster the 60 votes they would need to push a debt ceiling bill, with no strings attached, through the Senate. The measure would likely run into opposition from Senate Republicans such as Texas Senator Ted Cruz, who has been leading the drive to make delaying Obama's healthcare law a condition for raising the debt ceiling.
Democrats, and Obama, stepped up their criticism of House of Representatives Speaker John Boehner for refusing to schedule a vote on a separate unencumbered measure to fund the government and end the shutdown. They believe it would pass with most Democrats in the House voting for it along with a handful of Republicans. Boehner said Sunday that it would fail.
"If Republicans and Speaker Boehner is saying there are not enough votes, then they should prove it," said Obama.
Later on Monday, the House passed another of its targeted funding bills, this time to reopen the Food and Drug Administration, with 20 Democrats joining 215 Republicans. The Democratic-led Senate has rejected this approach, calling for re-opening the entire government.
Representative Lynn Westmoreland, a Georgia Republican, said the failure of the Senate to take up bills meant the government was likely to stay shut until a deal is crafted over the debt limit. "To me, we're into the debt ceiling fight now," he said.
Obama's press secretary, Jay Carney, told reporters the president would be willing to accept a short-term debt ceiling increase in order to get past the potential crisis date of Oct. 17 when the government hits the $16.7 trillion borrowing limit.
Carney said that while the White House would prefer raising the ceiling enough to last a year, "we have never stated and we're not saying today that the debt ceiling ought to be or can be any particular length of time."
A short-term increase would give Republicans and Democrats some breathing room, but by itself would not address the substantive issues preventing an agreement.
The last big confrontation over the debt ceiling, in August 2011, ended with an 11th-hour agreement under pressure from shaken markets and warnings of an economic catastrophe if there was a default.
OBAMA OPEN TO TALKS, AFTERWARDS
Obama said he is open to negotiations over his healthcare law, a slight change of tone, but only after Congress approves measures to end a week-long government shutdown and raise the U.S. debt ceiling.
"As soon as that happens I am eager and ready to negotiate with Republicans on a whole range of issues: how do we create more jobs, how do we build the economy, how do we boost manufacturing," said Obama, in a visit to the Federal Emergency Management Agency on Monday to spotlight the loss of government services because of the shutdown.
"I'm happy to talk about healthcare. I'm happy to talk about energy policy, how do we deal with our long-term fiscal situation," he said.
Obama has been particularly resistant to any tampering with his healthcare law, which has experienced a series of problems in the initial rollout. Any negotiations over it would be aimed at tinkering with it to improve it, not gut funding for it as Republicans want, White House aides have said.
Conservative Republicans in the House of Representatives have resisted funding the government for the current fiscal year until they extract concessions from Obama that would delay or defund his signature healthcare law.
Many conservative Republicans, particularly in the House, want a similar condition placed on raising the debt ceiling, as well as measures aimed at cutting deficits. They also play down the impact of failing to raise the debt limit, arguing the government could prioritize payments to cover bond interest and Social Security retirement payments.
More moderate Senate Republicans disapproved of using Obamacare as a bargaining chip from the start, arguing that it because it is non-negotiable for Democrats, it would inevitably lead to a shutdown and sour voters on the Republican Party.
The latest polling is bolstering their concerns. In the latest survey, by the Washington Post and ABC News, 70 percent disapproved of the way Republicans in Congress are handling the conflict versus 61 percent who disapproved of congressional Democrats.
Obama came off the best, with 51 percent disapproving of his handling of the crisis. The margin of error was plus or minus 3.5 percentage points.
A Senate Republican aide, who asked not to be identified, said that Portman's proposals were in an early stage, but it contained elements that could be acceptable to both sides.
Under the proposal, Obama would win a full year of government funding, instead of a short-term spending bill lasting several weeks that would have to be renegotiated in November or December, the aide said.
Republicans would get the strict across-the-board spending cuts that currently are in place, which many liberal Democrats, and some more centrist Republicans, want to scrap.
In addition, the fiscal package would contain $600 billion in savings over 10 years that already have been proposed by President Barack Obama in his budget submissions to Congress.
The aide said the savings would come mainly from "mandatory" programs. Those generally refer to Social Security, Medicare and Medicaid, the benefit programs for retirees and for the elderly and poor to receive healthcare.
The remaining piece of the puzzle would be instructions to tax-writing committees in Congress to write legislation by next year to reform the tax code in a way that would help further grow the U.S. economy.
The aide said that Portman has floated the idea to other Republican senators, including Senate Republican leader Mitch McConnell, as well as some Democrats.
Obama has limited room to negotiate on Social Security and Medicare thanks to his own Democrats, who have in the past resisted cuts to those programs.
Boehner vowed on Sunday not to raise the U.S. debt ceiling without a "serious conversation" about what is driving the debt, while Democrats said it was irresponsible and reckless to raise the possibility of a U.S. default.
Financial markets showed signs of growing anxiety on Monday over the dispute. The dollar and global equity markets fell on Monday with the Standard & Poor's 500 Index closing down 0.9 percent and the Nasdaq Composite Index dropping 1 percent.
The three main credit rating agencies have all warned that the United States rating could be cut should it hit an expected Oct. 17 deadline when Washington is set to run out of cash, endangering its ability to pay its debt.
The Pentagon said over the weekend that it would recall around 350,000 of its furloughed civilian workers. The rest of the 800,000 or so federal employees idled by the shutdown faced another week off the job.
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