WASHINGTON (Reuters) – Facing a looming deadline to avoid a default, Republican and Democratic lawmakers on Wednesday worked to combine elements of a plan to raise the debt ceiling with market-pleasing proposals to cut spending.
An ambitious new deficit reduction plan, unveiled on Tuesday by a group of senators known as the "Gang of Six," offers a ray of hope in an increasingly grim standoff that has threatened the United States' top-notch credit rating.
Congress must approve an increase in the $14.3 trillion U.S. debt ceiling by August 2 or the government will run out of money to pay its bills. Republicans and Democrats agree that spending cuts should accompany a debt-limit increase to tame mounting debt but have been unable to agree on the details.
White House talks on a comprehensive deficit-reduction deal stalled over tax increases, which Republicans still rule out.
President Barack Obama will meet with the Democratic leadership of the Senate and the House of Representatives at 2:50 p.m. EDT (1850 GMT) on Wednesday to discuss progress on the debt negotiations, the White House said.
Lawmakers have been scrambling to find a solution, and there is no single plan. The best option remains the one first billed as a backup, which passes responsibility, authority and potentially blame for raising the debt ceiling to Obama.
That might not be enough for Wall Street. The stalemate on debt talks has shaken global markets, and credit rating agencies have said that even if lawmakers raise the debt limit in time, America's top-notch triple-A credit rating will still be under pressure without a broad deficit-reduction plan.
Congressional leaders are looking to the Gang of Six plan for a way out of the impasse. A more modest proposal may be needed to avert default by August 2, but the $3.75 trillion Gang of Six plan could help lawmakers reach a broader deal shortly after that to address long-term fiscal problems and alleviate credit raters' concerns.
Initial reaction was positive. Obama seized on the plan as a "very significant step" on Tuesday and urged congressional leaders to start discussing it. Senators from both parties embraced it while Republican leaders in the House said it contained some good elements.
Investors welcomed the plan on Tuesday, driving up the price of 30-year Treasury bonds sharply and pushing global stocks higher. But on Wednesday, bond prices eased as Wall Street realized the road ahead remains long.
"We think that an agreement will be made, with a smaller package tied to an extension (of the debt limit) to the end of 2011 or even 2012, leaving the difficult decisions on entitlement reform or tax increases postponed to later in the year or more likely after the November 2012 election," said Carl Leahey, senior economist at Decision Economics.
An analyst from Fitch Ratings said it was encouraging that progress appeared to be being made on a substantial U.S. deficit-reduction deal and said the credibility of the bipartisan plan was as important as the overall savings amount.
(Additional reporting by Thomas Ferraro and Alister Bull; Writing by Deborah Charles; Editing by Will Dunham and Eric Beech)
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