Fresh credit warnings as US lawmakers trade blame (AFP)

WASHINGTON (AFP) – Standard & Poor's warned Sunday that there was a one in three chance of a further US credit downgrade, as lawmakers traded blame for the failure to rein in the country's massive debt.

The ratings agency docked the United States from a sterling AAA to a AA+ rating on Friday largely because of the failure of bitterly divided US leaders to reach a consensus on containing the country's spiraling debt.

"If the fiscal position of the United States deteriorates further, or if the political gridlock becomes more entrenched, then that could lead to (another) downgrade," S&P ratings head John Chambers told ABC television.

"The outlook indicates at least a one in three chance of a downgrade" over the next six to 24 months, he said on the network's political talk show "This Week."

He added that in the past it has taken countries nine to 18 years to regain a AAA rating, and warned that "it would take, I think, more ability to reach consensus in Washington than what we're observing now."

But despite early signs that Friday's downgrade could roil world markets and warnings of a new recession by a former top White House economist, senior Democratic and Republican lawmakers continued to trade blame.

Senator John Kerry, a moderate Democrat, called Friday's move a "Tea Party downgrade," referring to the ultra-conservative anti-tax movement, and said a debt deal reached last week after weeks of heated negotiations fell short because some Republicans "were willing to shoot the hostage."

"What we need is a Washington that stops this bickering," Kerry told NBC's "Meet the Press."

The deal to cut some $2.5 trillion over 10 years in exchange for raising the congressionally-set debt ceiling fell short of the S&P's call for the United States to cut $4 trillion over the same period.

Senator John McCain, a moderate Republican also appearing on Meet the Press, blamed President Barack Obama, saying he had failed to put forth a specific plan for reining in debts and deficits.

"I agree that there is dysfunction in our system, but a lot of it has to do with the failure of the president to lead," he said.

He then echoed Kerry's call for civility, saying: "Lately the Democrats have been calling us terrorists, so we need to lower that level of rhetoric."

Obama's former top economic advisor Larry Summers, appearing on CNN's "State of the Union," meanwhile warned of a new recession and attacked the S&P downgrade as an unwarranted piling on atop an already weak economy.

Summers insisted the country could pay its bills and repeated allegations from administration officials that S&P's decision to downgrade was linked to a $2 trillion accounting error and its use of a faulty baseline.

McCain, however, defended the S&P, saying: "Don't shoot the messenger."

"Is there anybody that believes that S&P is wrong in their assessment of the fiscal situation of this country?" he asked.

Washington has been deeply divided over how to reduce its more than $14 trillion debt without further hobbling the sluggish economic recovery, and even the limited debt deal came after a bruising partisan battle.

Obama and his Democratic Party have called for a "balanced approach" in which the government would raise taxes on the rich and major corporations while making some cuts in entitlement programs.

The Republicans, particularly those close to the Tea Party, have adamantly ruled out any new tax revenues, which they say would slow the recovery and stifle job creation.

The S&P has declined to take sides on the debate over tax revenues and spending cuts, saying it is more important that Washington reach a durable consensus that would reassure world markets.

Markets had closed by the time the downgrade was announced on Friday, but there were early indications that the S&P move, along with spreading eurozone debt contagion, could make for a rough Monday opening.

The Israeli market fell some six percent Sunday and Gulf markets tumbled on opening, although they later trimmed some losses.

Fears of a global meltdown, which some analysts see as potentially worse than the 2008 collapse, sent vacationing world leaders scrambling in a flurry of phone calls from London to Paris to Washington to try to stem the tide.

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Tense mood as lawmakers struggle for debt deal (Reuters)

WASHINGTON (Reuters) – A bitter mood prevailed on Capitol Hill as lawmakers struggled on Saturday to find a compromise measure to lift the nation's $14.3 trillion debt limit three days before a deadline to avert a ruinous default.

A day after the Republican-led House of Representatives passed a bill to cut the deficit and raise the cap on government borrowing, the debt saga shifted to the Democratic-led Senate.

Democrats there pushed ahead with their own plan and sought to attract bipartisan support by adding some elements of a plan offered by Senate Republican leader Mitch McConnell.

But 43 Senate Republicans signed a letter rejecting the plan, a sign the measure does not have the support it needs to advance in Congress.

"What will they vote for? Do they have any ideas? Let me know," Senate Democratic leader Harry Reid said on the Senate floor.

Back-channel talks held the best hope for a compromise. Unless Congress raises the debt ceiling, the government would be barred from further borrowing after Tuesday, according to the Treasury, and could quickly run out of money to pay all its bills.

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

McConnell called on Reid to move up a vote that had been set for 1 a.m. EDT on Sunday so the two sides could begin talks with the White House.

"We can't do it by ourselves, it has to have the only person in America who can sign something into law," McConnell said.

President Barack Obama urged lawmakers to strike a deal and head off what he has said would be an "inexcusable" default.

"There are multiple ways to resolve this problem," Obama, a Democrat, said in his weekly radio 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 House was set to vote at around 2:30 p.m. EDT on the plan crafted by Reid, and Republicans said they expected to defeat that bill because it did not contain enough spending cuts.

"The Senate is burning up precious time by working all weekend on a doomed Reid bill that can't pass the House," a House Republican leadership aide said. "Congressional talks are essentially motionless until Senator Reid provides specifics to the Hill on what the president will sign."

Democratic Representative Sander Levin said it was "disgraceful" that Republicans had scheduled their vote on the Reid plan before the Senate even had a chance to take it up.

CRUCIAL WEEKEND

With its back against the wall, the Treasury could be forced to detail plans on Sunday before Asian markets open on which bills it would pay if a compromise does not appear to be in the works. Analysts believe it will stop other government spending to ensure bondholders are paid to avert a wide-scale financial crisis.

The drawn-out standoff has put the United States at risk of losing its top-notch AAA credit rating. A ratings downgrade could prompt global investor flight from U.S. bonds and the dollar, raising borrowing costs for Americans when the economy is already frail, growing at an anemic rate of 1.3 percent in second quarter, according to government data.

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 debt deal doesn't appear to be on track by the time markets open on Monday.

Senate Democrats' debt-limit proposal, which would cut deficits by $2.2 trillion over 10 years, was revised by Reid to incorporate parts of a "backup plan" first proposed by McConnell. Under that version, Obama would be given 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.

The biggest sticking point in the effort to get a deal is House Republicans' insistence on a two-stage strategy for raising the debt limit that could set up another showdown over the issue within a few months. Obama says that would be unacceptable because it would lead to economic uncertainty, putting a damper on jobs and growth.

With Republicans pushing to have the White House join the talks, Vice President Joe Biden, who has a rapport with McConnell from his years in the Senate, could emerge as a key player in final negotiations.

(Additional reporting by Dave Clarke, Alister Bull and Laura MacInnis in Washington and Michael Erman and David Gaffen in New York; Writing by Caren Bohan; Editing by Vicki Allen)

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US lawmakers hunt for debt deal as deadline looms (AFP)

WASHINGTON (AFP) – Three days before a critical deadline, US President Barack Obama pressed polarized lawmakers Saturday to reach an urgent deal to avert a US debt default that could plunge the world economy into chaos.

With cash-strapped Washington facing a midnight Tuesday deadline when it runs out of cash to pay its bills, Obama said in his weekly address that "there are plenty of ways out of this mess. But there is very little time."

Obama noted that a stalemate could lead ratings agencies to downgrade the sterling US debt rating of Triple-A, causing a spike in interest rates that would throw a wrench into the gears of the already sputtering US economy.

"That would be inexcusable, and entirely self-inflicted by Washington. The power to solve this is in our hands," he said, as senators made a beat-the-clock push to hack a path to compromise through a jungle of partisan politics.

Number-two Senate Republican Jon Kyl accused Obama's Democrats of being unserious about making deep spending cuts and warned that the United States could soon face a Greece-style "debt crisis" of its own.

"With debt crises rolling across Europe, we know it is only a matter of time before people start to question whether America can sustain its huge and growing debt," he said in the weekly Republican rejoinder to Obama.

The rival appeals with the Republican-led House of Representatives due to kill a proposal from Democratic Senate Majority Leader Harry Reid, a tit-for-tat strike after the Senate beat back a House-passed Republican bill late Friday.

The Democratic-held Senate, meanwhile, was on course for a 1:00 am (0500 GMT) Sunday procedural vote on Reid's proposal to end the angry stalemate.

Behind closed doors, lawmakers tussled over the contours of a compromise expected to call for spending cuts roughly equal to Obama's request for a $2.4 debt limit increase, no tax hikes, and the creation of a special committee of lawmakers tasked with finding savings in the social safety net.

The US economy hit its $14.3 trillion debt ceiling on May 16 and has used spending and accounting adjustments, as well as higher-than-expected tax receipts, to continue operating normally -- but can only do so through Tuesday.

Business and finance leaders have warned that default would send crippling aftershocks through the fragile US economy, still wrestling with stubbornly high unemployment of 9.2 percent in the wake of the 2008 global meltdown.

Absent a deal, the US government will have to cut an estimated 40 cents out of every dollar it spends, forcing grim choices between paying its debt or cutting back on programs like those that help the poor, disabled, and elderly.

In a grim warning of what may come if there is no breakthrough by Tuesday, US markets fell for a fifth straight day on Friday -- a month of gains wiped out in a week of losses due to poor US growth and the political stalemate.

The House late Friday passed Speaker John Boehner's bill to avert a default, with 22 Republicans joining all 188 Democrats who voted in opposition to the plan, while 218 Republicans backed it -- eking out the 216 votes needed.

Within two hours, the Senate had rejected it in a 59-41 vote, with all of the White House's allies voting against the plan, joined by six Republicans who rejected it as insufficiently stringent.

Reid said he hoped Republican Senate Minority Leader Mitch McConnell would now help work out a final deal.

A key sticking point was the duration of any debt limit increase: Boehner's plan set the stage for another high-stakes showdown in a few months, while Reid's approach met Obama's goal of putting off another politically fraught debt battle until after the November 2012 elections in which he seeks a second term.

Boehner's bill had sought to pair raising the debt ceiling by $900 billion with spending cuts of some $917 billion over 10 years, while requiring later debt limit increases to be tied to congressional passage of a balanced budget amendment to the US Constitution for ratification by the 50 states.

Reid, whose Democrats oppose tying the debt limit to such an amendment, has offered a blueprint that would raise the debt ceiling by $2.4 trillion while cutting spending by some $2.4 trillion over 10 years.

And he grafted onto his bill a two-week-old "backup plan" mechanism by McConnell that would effectively allow Obama to raise the debt limit by that amount in three steps with only Democratic votes.

Neel Kashkari, who served as an assistant Treasury secretary during the George W. Bush administration and managed the fallout from the 2008 collapse of investment giant Lehman Brothers, said the global economic context in September 2008 was probably worse than today, but the US economy remains vulnerable.

"These factors suggest that a US downgrade has the potential to be as bad or perhaps worse than the Lehman shock," Kashkari wrote in The Washington Post.

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UK lawmakers likely to recall James Murdoch on hacking (Reuters)

LONDON (Reuters) – British lawmakers said on Friday it was likely they would recall News Corp's James Murdoch to clarify evidence on phone hacking he gave to a parliamentary committee following claims his testimony was "mistaken."

Parliament's Culture, Media and Sport Committee said it would write to Murdoch to ask for more details about evidence he gave earlier this month about hacking allegations at the News of the World tabloid that has shaken his father Rupert's media empire.

The two Murdochs, along with former News International chief executive Rebekah Brooks, appeared before the committee on July 19 when they were pressed about phone-hacking and payments to police by News of the World reporters.

"We are going to write to ask for further details on areas where evidence is disputed," said the committee's chairman John Whittingdale.

James Murdoch has already told the lawmakers he stands by his testimony in a letter dated July 22 and released by the committee on Friday.

While the committee voted against immediately recalling Murdoch, chairman of British newspaper arm News International, Whittingdale said it was likely he would be recalled at a later date over claims some of his original testimony was wrong.

Tom Crone, News International's former top legal officer, and Colin Myler, editor of the News of the World until it was shut down earlier this month, have disputed some of James Murdoch's evidence.

Murdoch said he had not been in possession of all the facts when he approved a large payout in 2008 to English soccer executive Gordon Taylor, one of the phone-hacking victims.

But in a statement, Myler and Crone said they had told him of a 2005 email which suggested phone hacking at the tabloid was more widespread than a single "rogue reporter," as News Corp had until recently maintained.

The paper's royal reporter Clive Goodman and private detective Glenn Mulcaire were jailed in 2007 for intercepting the voice messages of royal aides.

Whittingdale said the statement had "raised questions over some of the evidence that we have received" and they would also be contacting Crone and Myler.

ORAL EVIDENCE

"If they come up with statements which are quite plainly different to those given to the committee by James Murdoch, we will want to hear James Murdoch's response to that, and chances are that may well involve oral evidence again as well," he said.

Lawyers Harbottle and Lewis, who have also faced criticism over their role in an internal News International investigation into phone hacking in 2007, will also be asked by the committee for details of their work.

Later, Mulcaire issued a statement through his lawyer saying he was not acting on his own initiative when intercepting phone messages while in the pay of the newspaper.

"He (Mulcaire) was effectively employed by News of the World from 2002 to carry out his role as a private investigator ... he admits that his role did include phone hacking," the statement said.

"As an employee he acted on the instructions of others.

Any suggestion that he acted in such matters unilaterally is untrue," the statement added.

Allegations of hacking at News Corp's British newspapers, in particular reports that journalists accessed the voicemails of murder victims, have triggered a judicial inquiry and calls from some politicians to cap News Corp's media ownership.

It has already led to News Corp dropping its $12 billion bid for the 61 percent of pay-TV broadcaster BSkyB it does not own and put James Murdoch's position in the spotlight.

The board of BSkyB, which reported a better-than-expected 16 percent jump in full-year revenue to almost 6.6 billion pounds on Friday, voted unanimously on Thursday to keep James Murdoch as its chairman.

However some politicians are keen to keep up the pressure on News Corp and James Murdoch in particular.

"It's my view that Murdoch, Crone and Myler should have been invited today," said Labour lawmaker and Culture, Media and Sport Committee member Tom Watson.

"I understand from the decision we took that when we receive the evidence, no later than August 11, we are meeting the week after that to decide whether to invite them at that point."

Rupert Murdoch described his appearance before the committee as the "most humble day of my life." The 80-year-old's testimony was interrupted when a British protester threw a plate of foam at him during the hearing.

The attacker, Jonathan May-Bowles, a comedian who uses the name Jonnie Marbles, pleaded guilty to causing harassment, alarm or distress on Friday. [nL6E7IT0TF]

The phone-hacking scandal has barely been out of the headlines since it erupted at the start of the month and has engulfed the British establishment.

Baroness Buscombe, the head of the newspaper watchdog, the Press Complaints Commission, which has been heavily criticized for failing to address the issue, became the latest person to step down in the wake of the furor.

London's police chief Paul Stephenson and John Yates, Britain's most senior counter-terrorism officer, have already been forced to quit.

(Writing by Michael Holden and Tim Castle, Editing by Sonya Hepinstall)

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Lawmakers work on debt Plan B as deadline looms (Reuters)

WASHINGTON (Reuters) – With five days to go before President Barack Obama's deadline for a debt ceiling deal and no agreement in sight, Republicans and Democrats on Monday were crafting a fallback plan to avert a default.

Both parties agree on the need to raise the debt ceiling, which caps how much the United States can borrow, but are deeply divided along ideological lines over how to do it.

Treasury Secretary Timothy Geithner, however, remained optimistic that a deal was possible.

"Despite what you hear, people are moving closer together," Geithner, who met with top House of Representatives Republicans on Friday, told CNBC television. "You have seen the leadership of the Republican Party ... take default off the table. That's encouraging."

But the stalemate in Washington, along with debt problems in Europe, is unnerving financial markets worldwide amid fears that they could spiral into a global crisis. World stocks dipped and gold prices hit record highs above $1,600 an ounce as nervous investors sought a safe haven.

"There's a perfect storm happening on a global macroeconomic basis with no debt deal here and the ongoing issues in Europe, and the market is looking at all these things and is fairly anxious," said Oliver Pursche, president of Gary Goldberg Financial Services in Suffern, New York.

The top Republican in the Senate, Mitch McConnell, has submitted a plan that would essentially give Obama the power to raise the debt limit and take the political heat off Republicans. Senate leader Harry Reid hopes to begin debate on a modified version in the Democratic-led Senate this week.

McConnell's complicated plan to increase the debt limit in three stages has moved to the forefront as efforts to reach a comprehensive deficit-reduction deal have hit a wall.

Democrats and Republicans -- with an eye on 2012 elections -- are digging deeper into entrenched positions on taxes and entitlement programs such as Social Security and the Medicare healthcare program for the elderly.

Democrats want tax increases to be part of any final deficit reduction deal. Republicans say that would hurt a sputtering economic recovery and have taken aim at entitlement programs that Democrats have vowed to protect.

McConnell's plan, initially presented last week as a fallback option, is gaining traction as a viable solution in part because it would allow Republicans to avoid having to take a politically toxic vote on raising the debt limit.

Democratic aides said Reid and McConnell's staff were still trying to work out details of the plan, including spending cuts of about $1.5 trillion.

"The plan is still tenuous. We don't have the details yet. Everything is extremely fluid," a Democratic aide said.

The Senate, where Democrats have a majority, is expected to approve the final fallback plan but it is uncertain if the Republican-led House will go along.

"We (the Senate) are going to throw it to them (House Republicans) and see what happens," a Democratic aide said.

Democratic aides note that last week House Speaker John Boehner, the top U.S. Republican, declined to rule the McConnell plan in or out.

JULY 22

Obama had set a Friday deadline for Congressional leaders from both parties to agree on a deal to raise the country's debt ceiling. He said the July 22 deadline would give Congress enough leeway to write and pass legislation before August 2, when the government will run out of money to pay its bills.

Failure to increase the debt ceiling by then could send shockwaves through global financial markets and plunge the United States into another recession.

Credit rating agencies have signaled they may cut the top-notch AAA U.S. rating if the borrowing limit is not raised and deficit reduction measures are not laid out.

Fitch Ratings said on Monday if the debt ceiling is not raised before August 2 it would place the AAA rating on "watch negative," which means it could downgrade it within a three-to-six-month period. This echoed similar warnings from the other two big rating agencies, Moody's and S&P, last week.

Obama held White House talks with congressional leaders for five straight days last week. But no White House talks were listed on Obama's official schedule for Monday.

Senior Democratic aides said the Senate will likely begin considering the McConnell-initiated measure after "show votes" on a Republican balanced budget amendment as well as a Republican "cut, cap and balance" bill.

Boehner has scheduled a vote for Tuesday on his "cut, cap and balance" plan, which 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.

"If by Friday there is no meaningful agreement on Plan B and the parties remain far apart, the greenback could see panic selling as fears of possible technical default grip the market," said Boris Schlossberg, director of currency research at GFT in New York.

(Additional reporting by Rachelle Younglai, Andy Sullivan and Caren Bohan in Washington and Wanfeng Zhou in New York; Editing by Ross Colvin and Bill Trott)

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Lawmakers snipe, Bernanke warns as deadline nears (AP)

By JIM KUHNHENN and NANCY BENAC, Associated Press Jim Kuhnhenn And Nancy Benac, Associated Press – 30?mins?ago

WASHINGTON – Fuming lawmakers pointed fingers at one another and President Barack Obama on Thursday as negotiations over raising the national debt limit entered a perilous endgame. Federal Reserve Chairman Ben Bernanke warned of economic damage, and an anxious Wall Street envisioned catastrophe if the U.S. defaulted on its obligations.

Obama and congressional leaders were meeting again late in the day at the White House. But the president's blunt declaration that "enough is enough" as the previous evening's talks ended did nothing to quell the rancor as a new day of positioning and posturing played out.

Senate Majority Leader Harry Reid stood on the Senate floor Thursday and sniped that House Majority Leader Eric Cantor shouldn't even be part of the talks anymore, noting that the Virginia Republican has been called "childish." Not long after, Senate Republican Leader Mitch McConnell stood to serve notice that the debt problem belonged squarely in Obama's lap.

"Republicans will not be reduced to being the tax collectors for the Obama economy," McConnell said. "Don't expect any more cover from Republicans on it than you got on health care. None."

Federal Reserve Chairman Ben Bernanke, testifying on Capitol Hill, warned legislators that failing to raise the debt limit in time to avoid default would only end up increasing the federal deficit, calling that a "self-inflicted" wound.

He said default would drive up interest costs on the $14.3 trillion debt and reduce government revenues by slowing economic growth.

None of the back-and-forth was a promising prelude to negotiations scheduled to resume at the White House, less than three weeks before an Aug. 2 deadline for increasing the government's borrowing authority. Thursday's talks were to focus on the touchy matters of how to cut spending on Medicare and Medicaid and raise more tax revenue.

Behind the scenes, meanwhile, legislators and White House officials continued to work on a backup plan offered by McConnell.

Obama is demanding that budget negotiators find common ground by week's end, as the financial world watches with growing jitters.

"No one can tell me with certainty that a U.S. default wouldn't cause catastrophe and wouldn't severely damage the U.S. or global economy," Jamie Dimon, CEO of JPMorgan Chase & Co., told reporters Thursday. "And it would be irresponsible to take that chance."

Already, Moody's Investors Service is reviewing the government's credit rating, saying there is a small but rising risk that it will default on its debt. If Moody's were to lower the rating, the consequences could ripple through the economy, pushing up rates for mortgages, car loans and other debts. A Chinese rating agency, Dagong Global Credit Rating Co., also warned of a possible downgrade.

Reid sketched the potential consequences of default in dire terms, saying Social Security checks, veterans' benefits and paychecks for troops would stop. "Millions of Americans could lose their jobs," he added.

A Reid spokesman later clarified that Social Security benefits "could" stop, as Obama previously had warned, but it wouldn't be a certainty.

Republicans have called such statements scare tactics.

In the cauldron of the White House Cabinet Room, Obama and top lawmakers bargained for nearly two hours late Wednesday. Obama curtly ended the session when Cantor, R-Va., urged him to accept a short, monthslong increase in debt instead of one that would last through next year's presidential election.

"Enough is enough. ... I'll see you all tomorrow," Obama said, rising from the negotiating table and leaving the room, according to several officials familiar with the session.

Reid said that while other Republican leaders were willing to negotiate in good faith, Cantor "has shown he shouldn't even be at the table."

The United States hit its current $14.3 trillion debt ceiling in May and the Obama administration says the government will default on its obligations if the debt limit is not increased by Aug. 2. For a new debt ceiling to last to the end of 2012 would require raising it by about $2.4 trillion.

Republicans, in control of the House of Representatives in part because of the support of tea party activists, say they will not vote to raise the limit if Obama doesn't agree to at least an equal amount of deficit reductions over 10 years.

Obama and the top eight House and Senate leaders met for the fourth time in as many days Wednesday, and, despite the tense ending, agreed to meet again Thursday.

A congressional aide said the White House discussed with lawmakers the possibility of moving talks this weekend to the presidential retreat at Camp David in Maryland. But a spokesman for House Speaker John Boehner said the Ohio Republican told the White House he saw no need for that. And Obama aides later said they planned to continue holding meetings at the White House for the next few days.

Despite McConnell's assertions that the debt problem belongs to Obama, fresh polling from Quinnipiac University suggested voters would be more apt to hold Republicans responsible than Obama, by 48 percent to 34 percent, if the debt limit is not raised. The same survey showed voters were about evenly split on whether they're more concerned about raising the limit and increasing government debt, or seeing the government go into default and damaging the economy.

"The American people aren't very happy about their leaders, but President Barack Obama is viewed as the best of the worst, especially when it comes to the economy," said Peter Brown, assistant director of Quinnipiac's Polling Institute.

That helps explain why McConnell put forward a plan that would give Obama new powers to overcome Republican opposition to raising the debt ceiling.

The proposal would place the burden on Obama to win debt ceiling increases up to three times, provided he was able to override congressional vetoes — a threshold Obama could manage to overcome even without a single Republican vote and without massive spending cuts. Conservatives promptly criticized the plan for giving up the leverage to reduce deficits. But the plan raised the prospect of combining it with some of the spending cuts already identified by the White House in order to win support from conservatives in the House.

In an interview with radio talk-show host Laura Ingraham, McConnell described his plan in stark political terms, warning fellow conservatives that failure to raise the debt limit would probably ensure Obama's re-election in 2012. He predicted that a default would allow Obama to argue that Republicans were making the economy worse.

"You know, it's an argument he has a good chance of winning, and all of a sudden we (Republicans) have co-ownership of a bad economy," McConnell said. "That's a very bad positioning going into an election."

Sen. Charles Schumer, D-N.Y., said that while the president and other Democrats would still prefer a larger agreement, McConnell's plan was an acceptable option — especially if some consensus spending cuts were added. He said McConnell and Reid were discussing the idea.

Democratic officials said that even as Obama confronted Cantor and Boehner in Wednesday's meeting, he commended McConnell.

"Sen. McConnell at least has put forth a proposal," a Democratic official quoted the president as saying. "It doesn't reduce the deficit and that's what we have to do. It just deals with the debt limit. Now Sen. McConnell wants me to wear the jacket for that."

The officials said Obama went on to say they all had a responsibility to find a compromise.

____

Associated Press writers Dave Espo, Laurie Kellman, Ben Feller, Julie Pace, Martin Crutsinger and Erica Werner in Washington and Pallavi Gogoi in New York contributed to this report.

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Obama, lawmakers search for debt compromise (Reuters)

WASHINGTON (Reuters) – President Barack Obama and congressional leaders emerged from talks on Thursday still far apart on ending a deadlock over spending and taxes and said negotiators will work through the weekend in search of a compromise that would avoid a debt default.

Obama and congressional leaders aimed for a broad deal in negotiations that could involve changes to popular entitlement programs like Social Security. This follows weeks of acrimony and political finger-pointing.

Obama, briefing reporters after 90 minutes of talks with congressional leaders, said both sides were still far apart and that negotiators will work through the weekend to find each side's bottom line.

He said he will hold another round of talks with House of Representatives Speaker John Boehner, Washington's top Republican, and other lawmakers on Sunday for what he hopes will be "the hard bargaining that's necessary to get a deal done."

"Everybody acknowledged that there's going to be pain involved politically on all sides but our biggest obligation is to make sure that we are doing the right thing," he said.

An August 2 deadline is looming to raise the $14.3 trillion debt ceiling. Failure to do so would risk tossing the government into default, a move that could push the country back into recession and send shock waves through financial markets around the globe. Obama wants a deal by July 22 to avoid rattling markets.

"We're in the end game here," said White House spokesman Jay Carney.

Normally a routine vote, the debt ceiling has been embroiled in partisan politics, with Republicans seeking to impose deep spending cuts to reduce the $1.4 trillion budget deficit and satisfy their conservative Tea Party supporters.

Obama, seeking to avoid angering his liberal base ahead of his 2012 re-election bid, wants tax increases on the wealthy to lessen the pain of spending cuts.

"I want to emphasize that nothing is agreed to until everything is agreed to and the parties are still far apart on a wide range of issues," Obama said.

Boehner repeated ahead of the talks that Republicans are "not interested in raising taxes."

He said, however, that comprehensive tax reform is on the table and that changes are needed in benefit programs for the poor and elderly to ensure their long-term viability.

"We believe that comprehensive tax reform, both on the corporate side and the personal side, will make America more competitive, help create jobs in our country, and is something that is under discussion," Boehner told a Capitol Hill news conference.

With Republicans showing new flexibility on taxes, Democrats say Obama will push negotiators to double their target to $4 trillion in budget savings over 10 years.

That would be an ambitious goal, but there have been a few hints of progress since talks hit a brick wall two weeks ago.

Obama and Boehner have recently discussed broadening the deal to tackle politically sensitive overhauls of the tax code and benefits like Social Security, Medicare and Medicaid, a Republican aide said.

(Additional reporting by Laura MacInnis, Matt Spetalnick, Richard Cowan, Rachelle Younglai, Tim Reid and Caren Bohan; Editing by Vicki Allen)

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IMF urges US lawmakers to raise $14.3T debt limit (AP)

By CHRISTOPHER S. RUGABER, AP Economics Writer Christopher S. Rugaber, Ap Economics Writer – 42?mins?ago

WASHINGTON – The International Monetary Fund urged U.S. lawmakers Wednesday to raise the nation's borrowing limit, warning that inaction could lead to a spike in interest rates that would harm the U.S. economy and world financial markets.

The debt limit is the amount the government can borrow to help finance its operations. The United States reached its $14.3 trillion borrowing limit in May. It is at risk of defaulting on its debt if it doesn't raise that limit by Aug. 2.

A disagreement over how to rein in the federal budget deficit has kept Congress from raising the borrowing limit. Republicans want President Barack Obama and Democrats to first agree on spending cuts equal to any increase in the borrowing limit. Democrats say any deficit-reduction deal must also include some tax increases.

The IMF warned in its annual report that rising U.S. budget deficits pose a risk to the economy. But it advocated a long-term strategy for reducing those deficits, not steep immediate cuts or tax increases. Cutting the deficit too quickly could slow the weak U.S. recovery, the fund said.

John Lipsky, acting managing director of the IMF, said a default on the debt "would have very serious and far-reaching consequences." But he added that the fund is confident the two sides will reach a deal.

Separately, President Obama insisted Wednesday that eliminating selected tax breaks for oil companies and the super-wealthy must be part of any deficit reduction plan. He also said that a bipartisan agreement is possible to cut deficits, raise the government's debt limit and avert a threatened financial crisis.

Obama said both Democrats and Republicans must be prepared to "take on their sacred cows" as part of the deficit-reduction negotiations.

Republicans say they will not support any proposal that raises taxes.

Treasury Secretary Timothy Geithner strongly criticized a Republican proposal that would prioritize interest payments on the nation's debt and cut spending rather than raise the borrowing limit.

Geithner said in a letter addressed to Sen. Jim DeMint, a South Carolina Republican, that the idea is "a radical and deeply irresponsible departure" from previous practices by presidents of both parties. The letter was copied to 16 other Senate Republicans, including Majority Leader Mitch McConnell.

The U.S. economy will grow this year and next but at a weak pace, the IMF forecasts. The fund projects the economy will expand 2.5 percent this year and 2.7 percent in 2012. Consumers are still paying off debts, which will reduce their buying power. And budget cuts at the federal, state and local levels will also reduce demand.

Lipsky noted that the fund's forecast for this year included an expectation that growth would pick up in the second half of this year, as gas prices have retreated from their peak last month of nearly $4 a gallon. And disruptions in auto manufacturing stemming from Japan's March 11 earthquake, which reduced the availability of key parts, is also likely to fade.

The IMF's forecast is below recent projections by the Federal Reserve. The Fed expects the economy will grow by as much as 3.3 percent next year. Many private forecasters, however, are more pessimistic and closer to the IMF's view.

The IMF's warnings on the U.S. deficits echo recent statements from major credit rating agencies such as Standard & Poor's and Moody's. They have warned that they may have to downgrade the United States' credit rating if a deal on the debt ceiling isn't reached and progress toward cutting the deficits isn't made.

Such a downgrade would have "significant global repercussions," the IMF said, given "the central role of U.S. Treasury bonds in world financial markets."

The budget deficit is projected to reach $1.4 trillion this year, above last year's $1.29 trillion gap and just below a record $1.41 trillion reached in 2009.

The IMF has 187 member nations and lends money to countries with troubled finances. It also regularly reviews major national economies to look for signs of trouble that could impact the world economy.

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AP Writer David Espo contributed to this report.

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Greek lawmakers endorse austerity despite violence (Reuters)

ATHENS (Reuters) – Greece's parliament approved deeply unpopular austerity measures despite worsening street violence on Wednesday, in a vote vital to secure international aid and prevent the euro zone's first sovereign debt default.

Lawmakers passed a five-year package of spending cuts, tax rises and state asset sales by a comfortable margin of 155 votes to 138 in a roll-call vote, handing a victory to embattled Prime Minister George Papandreou.

"We must avoid the country's collapse at all costs. Now is not the time to step back," the Socialist premier told lawmakers just before the vote.

The solid margin suggested the government should be able to push through laws implementing specific budget measures and asset sales on Thursday, clearing the last obstacle to obtaining 12 billion euros ($17.3 billion) of emergency loans.

But with the country on the brink of bankruptcy and social unrest mounting, it is unclear whether the government can stick to the tight schedule imposed by the European Union and the International Monetary Fund to implement the austerity steps, even if it wins all this week's parliamentary votes.

The full pain of pay and benefit cuts and sharp tax increases has yet to be felt, and public anger is boiling.

Outside parliament, there were clashes between stone-throwing masked youths and riot police, who fired clouds of teargas from behind steel crash barriers to keep rioters at bay.

One group of anarchists armed with staves and iron bars attacked finance ministry offices just off Syntagma Square, smashing windows at the entrance and on higher floors. A post office on the ground floor of the ministry building was set on fire, sending acrid grey smoke billowing into the sky.

In cat-and-mouse clashes with police, rioters erected makeshift barricades with benches, chairs and garbage bins on the fringes of the square, where thousands of peaceful protesters demonstrated against the austerity plan.

Chancellor Angela Merkel of Germany, Europe's reluctant paymaster and the main contributor to the bailout of Greece, was quick to praise the "brave" vote. But Finance Minister Wolfgang Schaeuble stressed the importance of "implementing these (measures) with resolve in the coming weeks, months and years."

The presidents of the European Council and the European Commission, Herman van Rompuy and Jose Manuel Barroso, said in a joint statement that Greece had taken "a vital step back -- from the very grave scenario of default."

However, many economists and investors still expect Greece to default in the medium term because its 340 billion euro pile of sovereign debt is so huge, about 150 percent of the country's annual economic output. A senior German ruling coalition politician, Free Democratic floor leader Rainer Bruederle, said on Wednesday that a debt restructuring was inevitable.

Expectations for a positive vote and progress in talks between banks and euro zone governments on a rollover of privately held Greek debt lifted the euro and global stocks on Wednesday. Prices of bonds issued by the zone's weaker states rose.

But markets then fell back slightly after news of parliament's decision.

"This is logical and may continue over the next couple of hours and days as markets will quickly realize that this is only a first step on the road to recovery," said Philippe Gijsels, head of research at BNP Paribas Fortis Global Markets.

"We still expect a hot, nervous and volatile summer."

ROLLOVER

Despite a threat by trade unions staging a 48-hour general strike to prevent lawmakers entering the colonnaded parliament building, deputies were able to reach the chamber. Strikes and sporadic violence have not blown the government off course so far, but its approval rating has plunged in recent months.

Only one deputy in the ruling PASOK party voted against the plan and was immediately expelled from the party by Papandreou. At least one opposition deputy broke ranks with the main conservative New Democracy party and voted "yes."

PASOK now holds 154 seats in the 300-member chamber and it was helped on Wednesday by the abstention of a small center-right splinter group of five deputies led by former foreign minister Dora Bakoyanis.

The EU and the IMF have insisted Greece must adopt the austerity plan, which seeks to save the government 28 billion euros, in order to receive its next slice of aid. Without the money, Athens would run out of cash within weeks.

In May last year Greece signed a 110 billion euro bailout deal with the EU and the IMF, which later jumped in to keep Ireland and Portugal afloat as the euro zone reeled from high government debt in the wake of the global financial crisis.

If Greece's fiscal legislation passes on Thursday, euro zone finance ministers meeting in Brussels on Sunday are expected to agree to release their part of the next aid tranche, with the IMF following on July 5.

Attention will then switch to putting together a second and longer-term rescue package for Greece of about the same magnitude as the initial 110 billion euro bailout.

The new program would involve some 30 billion euros in private-sector participation via a "voluntary" rollover of maturing debt, a similar sum from Greek privatization revenues, and an expected 55 billion euros in new official funding.

Banking sources said politicians and commercial bankers were confident that credit rating agencies would accept a French proposal for a voluntary private sector rollover of Greek debt without triggering a default or a payout of credit insurance.

The agencies have made no public comment on the plan, details of which are still under negotiation.

Euro zone banks and insurers are considering a scheme under which private bondholders would reinvest half of the proceeds of maturing Greek debt in new 30-year bonds paying 5.5 percent interest plus a bonus linked to Greece's economic growth rate.

Of the other half, 30 percent would be paid back to investors in cash and 20 percent invested in a "guarantee fund" of zero-coupon AAA securities with deferred interest that might be issued by the euro zone's bailout fund, officials and banking sources said.

In addition to the rating agencies, the rollover scheme will need the approval of the European Central Bank, and ECB policymaker Juergen Stark rejected on Wednesday any scheme that involved EU guarantees of bonds, saying it would breach European treaty rules.

Asked about a scenario in which banks would exchange their Greek bonds for new paper guaranteed by EU states -- an approach similar to the "Brady bonds" used in Latin America in 1989 -- he said: "This instrument is disqualified.

French banks had the largest exposure to the Greek economy, both the public and private sectors, at the end of 2010 with over $56 billion, data from the Bank for International Settlements shows. The next most exposed country is Germany.

(Additional reporting by George Georgiopoulos, Daniel Flynn and James Mackenzie in Athens, Philipp Halstrick and Ed Taylor in Frankfurt, Stephen Brown in Berlin, and Atul Prakash and Jeremy Gaunt in London; writing by Paul Taylor; editing by Janet McBride and Andrew Torchia)

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Greek rebel lawmakers may block austerity: deputy PM (Reuters)

ATHENS (Reuters) – Greece's deputy prime minister warned on Sunday that rebel lawmakers may block some reforms sought by international lenders, though parliament will probably back an overall austerity package this week to avert national bankruptcy.

Adding to Socialist Prime Minister George Papandreou's dire problems, the conservative opposition rejected appeals from the government and senior European Union politicians to vote in favor of the five-year plan.

Parliament is due to start debating on Monday the programme of tax increases and spending cuts worth 28 billion euros. Papandreou needs parliamentary approval this week to secure the next payment under a 110-billion euro EU/IMF bailout.

Deputy Prime Minister Theodore Pangalos told Spanish newspaper El Mundo he was optimistic about overcoming discontent in his PASOK party to win a first round of general votes on tax and spending targets and the creation of a privatisation agency.

But he was more cautious about whether the government could push through further enabling legislation on individual budget measures and privatisation of specific state assets.

"I think the package of short and medium-term measures with which we basically hope to establish the framework to undertake reforms will be approved without difficulty," Pangalos told the newspaper in the interview published on Sunday.

Approval of specific laws to enact painful fiscal reforms and privatisations may be more difficult to achieve, he said.

"That's where we may have problems. I don't know whether some of our legislators will vote against it. It's possible."

Without the next 12-billion euro tranche of funding from the IMF and European Union, Greece faces the prospect next month of becoming the first euro zone country to default, sending shockwaves through a fragile global financial system.

But many Greeks who have lost jobs or seen their real income decline by nearly one-fifth over the last two years have reacted angrily to measures they say fail to target wealthy tax evaders whom they regard as responsible for Greece's plight.

Papandreou's PASOK party has seen its slender majority whittled down by five defections over the last 13 months, leaving it with 155 seats in the 300-member parliament.

In a rare piece of good news for Papandreou, one of the two PASOK legislators who announced they would vote against the package appeared to be wavering on Sunday after holding talks with Finance Minister Evangelos Venizelos at the weekend.

"One moment I veer toward a 'no', the other toward a 'yes'. I will make a last-minute-decision," Thomas Robopoulos told Reuters. A third Socialist MP has said he will support the deal only if Venizelos gives him assurances on certain measures.

NATIONAL STRIKE

With Greece unable to return to international bond markets next year, as foreseen under its EU/IMF programme, European leaders are working on a new bailout of a similar size, including a contribution from private sector banks which would agree to a "voluntary" rollover of their holdings of Greek debt.

Euro group president Jean-Claude Juncker, the prime minister of Luxembourg, said on Sunday that the size of this private sector contribution would be discussed at a euro zone finance ministers' meeting in early July.

Ramping up pressure on the government, unions have called a two-day national strike from Tuesday. Many companies, including the main electricity group PPC which is slated for partial privatisation next year, have started rolling stoppages.

Pangalos, who after a cabinet reshuffle this month shares his deputy premier's title with Venizelos, said he believed the conservative opposition would vote in favor of some measures.

But New Democracy leader Antonis Samaras turned a deaf ear to the appeals from home and abroad to support the package, saying the painful measures would only deepen Greece's worst recession in 37 years.

"You can't ask for more taxes in an already overtaxed country, in a market that has been sucked dry, with economic activity at zero and a huge recession," he said in a statement.

Greek ministers and policymakers had urged legislators to approve the austerity package, adding to calls from European leaders to avoid a crisis in the 17-member euro zone.

German Finance Minister Wolfgang Schaeuble urged the Greek parliament to approve the measures, warning that the EU would not relax this condition for disbursing the next aid tranche.

"The stability of the entire euro zone would be in danger and we would need to quickly ensure that the risk of contagion for the financial system and other euro area countries would be contained," he told German Sunday newspaper Bild am Sonntag.

Venizelos, a Socialist party baron given the finance portfolio in the cabinet reshuffle, clinched the agreement of EU and IMF inspectors on Thursday to a raft of measures which he hopes can put government finances back on an even keel after it failed to meet targets under its international programme.

The steps include a one-off solidarity levy on income, a rise in heating fuel tax and the introduction of income tax even for low earners on wages of 8,000 to 12,000 euros a year.

A peaceful crowd of around 1,000 people gathered on Sunday in Syntagma square outside parliament, which was protected by a line of riot police.

With youth unemployment running at around 40 percent, many of those who have taken to the streets in protest or camped in Syntagma over the last month are young people who fear the measures will worsen their dim economic prospects.

"The choice is not between voting for the measures or defaulting, but between economic and social bankruptcy on the one hand and growth and social cohesion on the other," said the Left Coalition, a small opposition party, in a statement.

(Additional reporting by Tracy Rucinski in Madrid; editing by Ralph Boulton)

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