Officials scramble for debt deal as clock ticks (Reuters)

WASHINGTON (Reuters) – White House officials and Republican leaders scrambled on Sunday to reassure global markets the United States would avert a debt default but the two sides gave no sign they were moving closer to a deal.

Treasury Secretary Timothy Geithner said it was unthinkable that the country would default on its obligations and he was confident a deal would get done.

"What the leaders know is that they need to agree on something together that will pass the House (of Representatives), pass the Senate that the president can accept," Geithner told CNN's "State of the Union" program.

But the path forward was murky.

With Asian markets set to open in a few hours, Democrats and Republicans traded blame for the inability to strike a deal to lift the $14.3 trillion limit on U.S. borrowing ahead of an August 2 deadline. Republican leaders want to show progress by 4 p.m. EDT on Sunday, before trading gets underway in Asia, and have legislation to unveil on Monday.

Financial markets are growing more edgy and U.S. banks and businesses are making contingency plans for the possibility of a debt default that would drive up interest rates, sink the dollar and ripple through economies around the world.

Global investors are still reeling from the euro zone crisis that was contained only a few days ago with the unveiling of a fresh rescue package for Greece.

Republican House of Representatives Speaker John Boehner told "Fox News Sunday" he would unveil a bipartisan deal to raise the debt ceiling.

"The preferable path would be a bipartisan plan that involves all the leaders, but it is too early to decide whether that's possible," Boehner said. "If that's not possible, I and my Republican colleagues in the House are prepared to move on our own."

The United States will run out of funds to service its debt on August 2 if Congress does not approve additional borrowing. Republicans have insisted the White House agree to deep spending cuts for long-term deficit reduction before they approve any increase in America's debt burden.

Negotiations have whipsawed for weeks, finally hitting a brick wall over taxes, one of the most ideologically divisive issues in U.S. politics.

'THEIR WAY OR THE HIGHWAY'

White House chief of staff Bill Daley accused House Republicans of intransigence, telling CBS' "Face the Nation" they were insisting that any deal has to be "their way or the highway."

Administration officials also said President Barack Obama would not accept a two-tiered proposal offered by Boehner that would lift the debt ceiling through the end of 2011 and then require another vote.

Daley said it was critical Congress approve a new debt ceiling that gets the country into 2013, past the November 2012 presidential election.

On Fox, Boehner said raising the debt ceiling and implementing major reforms would have to be done in two stages. "There is going to be a two-stage process. It is not physically possible to do all of this in one step."

Administration officials said a far-reaching "grand bargain" that would combine a debt-limit increase with a 10-year plan to reduce the deficit by $4 trillion was still a possibility, despite Boehner's decision on Friday to walk away from talks with the White House on such a plan.

Boehner said his last offer to the White House on the larger deal was still on the table. That offer included some $800 billion in new tax revenue and massive spending cuts.

To pass any deal that includes more tax revenue, Boehner must overcome staunch resistance from Tea Party movement conservatives in his own party, who adamantly oppose any steps to raise taxes, fiercely defending tax cuts for the rich enacted during the administration of George W. Bush.

Rating agencies say they will cut America's Triple-A credit rating if the United States fails to meet debt payments, likely triggering global market turmoil. Even if the United States does not default, its rating will be under pressure if Congress and the president fail to tackle long-term deficit reduction.

Macroeconomic Advisers, a consultancy, said a failure to lift the debt ceiling and a month-long delay in agreeing on a modest deficit-reduction plan could push the unemployment rate to 9.6 percent by the end of the year, up from 9.2 percent in June.

"It seems the height of policy folly for elected officials, intent on a game of budgetary chicken, to chance this downside risk during an economic recovery that was sub-par to begin with and lately seems to have faltered further," Macroeconomic Advisers said in a blog on Friday. "Sometimes in a game of chicken, people get injured -- seriously."

(Additional reporting by Dave Clarke, Donna Smith, Richard Cowan, Andy Sullivan, Laura MacInnis and Alister Bull; Editing by Will Dunham and Todd Eastham)

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Debt talks grind on, clock ticks toward default (AP)

WASHINGTON – Budget talks between President Barack Obama and his GOP rivals are at a frustrating standstill, leading a top Republican to launch a long-shot proposal to give Obama sweeping new powers to muscle through an increase in the government's debt limit without the approval of a bitterly divided Congress.

Lawmakers return to the White House Wednesday for their four negotiating session with the president in as many days. Obama has said the daily meetings will continue until a deal is reached.

A two-hour session Tuesday produced no progress after a day of poisonous exchanges between Democrats and Republicans.

Senate GOP leader Mitch McConnell of Kentucky offered a backup plan that would, in effect, guarantee Obama requests for new government borrowing authority unless Congress musters veto-proof majorities to deny him. McConnell said he was forced to introduce the plan because he didn't see a path to an agreement so long as Democrats insist on revenue increases.

McConnell said Wednesday that his proposal was a "last resort if the president continues to shirk his duties to do something about our dire fiscal situation."

"Make the president show in black and white the specific cuts he claims to support. If he refuses he'll have to raise the debt ceiling on his own," McConnell said on the Senate floor. "But he's not going to get Republicans to go along with that."

McConnell's proposal immediately ran into stiff opposition among tea party conservatives and seemed unlikely to pass the House, but neither the White House nor House Speaker John Boehner, R-Ohio, dismissed it out of hand.

"I think everybody agrees there needs to be a backup plan if we can't come to an agreement," Boehner said in a Fox News Channel interview Tuesday afternoon. "And frankly, I think Mitch has done good work."

Under McConnell's proposal, Obama could request — and likely secure — increases of up to $2.5 trillion in the government's borrowing authority in three separate installments over the coming year as long as he simultaneously proposed spending cuts of greater size.

The debt limit increases would take effect unless blocked by Congress under special rules that would require speedy action — and even then Obama could exercise his authority to veto such legislation. But the president's spending would have no guarantee of receiving a vote.

"The American people elected (McConnell) to serve as a check on Obama's appetite for out-of-control spending, not to write him a blank check to continue the binge," said conservative activist Brett Bozell. "It's these sort of shenanigans that got Republicans thrown out of power in 2006."

Tea party favorite Sen. Jim DeMint, R-S.C., asked about McConnell's plan Wednesday on CBS' "The Early Show," said, "Republicans weren't elected last November to make it easier to spend and borrow and add to our debt."

GOP presidential candidate Newt Gingrich wrote on Twitter, "McConnell's plan is an irresponsible surrender to big government, big deficits and continued overspending."

Republicans, meanwhile, continued pushing for a balanced budget amendment that would require Washington to balance its books. McConnell said politicians in Washington have showed they can't get the job done, and "If the president won't do something about the debt we'll go around him and take it to the American people."

McConnell made his proposal public a few hours before Obama presided Tuesday over his third meeting in as many days with congressional leaders searching for a way to avoid a default and possible financial crisis.

Democratic officials who participated in the session said Obama did not reject McConnell's idea, but said it's not his preferred approach. A statement issued later by press secretary Jay Carney said the president "continues to believe that our focus must remain on seizing this unique opportunity to come to agreement on significant, balanced deficit reduction."

McConnell's plan was hatched out of frustration that Congress and Obama are deadlocked as the clock ticks toward an Aug. 2 deadline for a market-rattling default on U.S. obligations. McConnell said he still hoped a deal could be reached, but that a backup plan would show the markets and public that default is not an option.

Republicans are demanding $2 trillion-plus in budget cuts as the price for a commensurate increase in the government's ability to continue to borrow more than 40 cents of every dollar it spends. Both Republicans and Obama see the politically toxic debt limit vote as a way to seize an opportunity to cut future deficits — a move that would seem to be to the political benefit of both sides.

But GOP refusals to consider devoting any new revenue from closing tax loopholes — like those enjoyed by oil and gas companies — to cutting the deficit has led Democrats to withhold further spending cuts beyond a handful tentatively agreed to during several weeks of talks led by Vice President Joe Biden in May and June. For their part, Republicans say the White House is offering minuscule spending cuts in the near term and is pulling back from some tentative agreements on topics like requiring federal workers to contribute more to their pensions.

Staffers were meeting at the White House Wednesday morning to work out agreements on specific cuts discussed during those earlier Biden-led talks. The meeting with Obama, Biden and congressional leaders later Wednesday was expected to build on those discussions.

Obama himself upped the stakes Tuesday, telling CBS News anchor Scott Pelley that more than $20 billion in Social Security checks could be held up.

"I can't guarantee that the checks will go out Aug. 3 if we haven't resolved this," Obama said. "There may simply not be the money in the coffers to do it."

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