* McConnell, Reid negotiate on plan to avert default
* Aides see Senate support for "Plan B," House in doubt
* Obama aide says still time for significant deficit deal
(Adds no talks scheduled for Monday, governors' reactions)
By Thomas Ferraro and Caren Bohan
WASHINGTON, July 17 With time running short in
U.S. debt talks, Republican and Democratic senators sought on
Sunday to craft a plan that could avert an unprecedented
government default while making modest cuts in the deficit.
Aides to President Barack Obama said he still holds out
hope for a "grand bargain" that would combine a deal for up to
$4 trillion in deficit reduction with an agreement to raise the
country's borrowing limit.
But there were few signs of progress as the Aug. 2 deadline
to avoid a default drew dangerously close.
Behind the scenes, Senate Republican leader Mitch McConnell
and Senate Democratic leader Harry Reid were negotiating over a
fallback plan proposed by McConnell that would allow Obama to
raise the debt limit while sparing Republicans from having to
vote in favor of it.
Senior Democratic aides said the U.S. Senate will likely
begin considering the compromise measure this week. They
predicted the Democratic-led Senate would pass the legislation,
but winning over the Republican-led House of Representatives
would pose a bigger challenge.
"Barring a breakthrough, this is going to be the plan," one
congressional aide said. "We are working under the assumption
that there won't be a (deficit) plan."
Full coverage of U.S. budget and debt [ID:nUSBUDGET]
Analysis on balanced budget amendment [ID:nN1E76E18M]
Breakingviews-Bluster hides progress [ID:nN1E76D0E3]
Reuters Insider on debt link.reuters.com/bus62s
Making the rounds on the Sunday morning talk shows, White
House budget director Jack Lew told CNN's "State of the Union"
program he believed that all of the leaders in Congress
"understand it would be irresponsible to get to Aug. 2" and not
have a debt-limit increase.
If Congress does not raise the $14.3 trillion limit on U.S.
borrowing by then, the government will run out of money to meet
all it's payments. Economists and administration officials have
warned this would trigger a crisis in global financial markets
and plunge the United States into another recession.
Obama's quest for a debt-limit increase and a $4 trillion
deficit reduction deal hit a major obstacle a week ago when
Republicans in Congress rejected his demand that tax increases
on the wealthy be part of the plan.
Lew told NBC's "Meet the Press" that there was still time
to achieve a far-reaching deal. "The president has made it
clear he wants to do something substantial," he said.
But a growing number of private-sector experts believe the
solution to the debt standoff might lie in the "Plan B"
sketched out by McConnell.
That proposal would involve a convoluted legislative
maneuver to raise the debt limit in three stages. It would put
the burden on Obama's Democrats to approve the increase, but,
in its initial form, it would not require spending cuts.
Reid is seeking some changes to make the plan more
palatable to Democrats, including a requirement of up to $1.5
trillion in spending cuts. The cuts would consist of those
identified by a deficit-reduction group headed by Vice
President Joe Biden. Aides to McConnell and Reid have also
discussed creating a bipartisan panel on deficit reduction.
Still, the idea could be a tough sell in the Republican-led
House where it has been greeted coolly by conservative Tea
Obama had set a weekend deadline for an action plan from
the lawmakers and said he might call them back for further
White House talks. But there were no meetings over the weekend.
As of Sunday evening, no talks were planned for Monday.
"Conversations have continued throughout the weekend, but
there is no news or progress to report," said Michael Steel, a
spokesman for House Speaker John Boehner, the top U.S.
Republican. Boehner has scheduled a vote for Tuesday on his
"cut, cap and balance" plan that would condition an increase in
the debt-limit on passage of a constitutional amendment to
require the federal government to balance its books each year.
That bill stands little chance of passing the Senate but it
might buy some goodwill with conservatives to eventually allow
for passage of a compromise, such as the McConnell plan.
State governors, fearing the effects of the debt talks on
their own credit ratings, have pressured Washington to get a
At a meeting of the nation's governors in Salt Lake City,
Utah, Washington Governor Christine Gregoire said they agreed
the debt limit should be increased.
"We're getting hurt by the inaction of what's going on in
Washington D.C.," Gregoire, chairwoman of the National
Governors Association, told Reuters.
Mississippi Governor Haley Barbour, a Republican, said that
as far as he knew, all of the governors present thought the
debt ceiling needed to be raised but there were differences on
what the legislation should look like. "There are people like
me who think raising taxes would be very harmful to the
economy," Barbour said.
(Additional reporting by Alina Selyukh and Donna Smith in
Washington and Edith Honan in Salt Lake City. Writing by Caren
Bohan; Editing by Christopher Wilson)