Analysis: Economic leaders fear policy paralysis (Reuters)

JACKSON HOLE, Wyoming (Reuters) – The heads of the U.S. Federal Reserve, IMF and OECD stepped up pressure on political leaders on both sides of the Atlantic to shake off their inertia and tackle urgent economic problems.

If politicians ignore their pleas -- including a blunt call from International Monetary Fund chief Christine Lagarde to "act now" -- the slowdown in world growth and debt turmoil in Europe could morph into a deeper crisis, top monetary officials and economists warned at an annual retreat here.

"I hope they listen," said Bank of Israel Governor Stanley Fischer.

Alarm over political deadlock was as obvious a backdrop to the annual meeting of policymakers in the wilds of Wyoming as the thunderstorms that rolled over the nearby Grand Teton peaks and dumped rain on the Jackson Lake Lodge.

"The governance right now is not going through a very brilliant moment, I have to say, neither in Europe nor in the United States," Angel Gurria, who heads the multi-nation Organization for Economic Co-operation and Development, told Reuters.

"The signals that are coming out of the short-term discussions is, 'We can't even agree on about the time of the day, even if there's a big clock telling us what the time of the day is.'"

In the United States, the political impasse has thwarted moves to tame massive budget deficits which brought the nation to the edge of a debt default and cost the United States its coveted AAA credit rating from Standard & Poor's.

In Europe, leaders are fighting over who should pay for the sovereign debt crisis in the euro zone, which has a unified regime for monetary policy but whose member nations run their own budget policies.

PHONE CALLS, SPEECHES

Lagarde, whose appearance on Saturday was a late addition and reflected her sense of urgency, delivered a hard-hitting pitch against braking spending too fast as nations struggle to rein in long-term budget deficits.

She was far from alone.

The Fed has slashed U.S. interest rates to near zero and bought $2.3 trillion in long-term securities in an effort to kick-start the recovery. With monetary policy stretched to its limits, fiscal policy is now key, Fed Chairman Ben Bernanke suggested.

"Although the issue of fiscal sustainability must urgently be addressed, fiscal policymakers should not as a consequence disregard the fragility of the current economic recovery," he said on Friday.

"Fortunately the two goals of achieving fiscal sustainability -- which is the result of responsible policies set in place for the longer term -- and avoiding the creation of fiscal headwinds for the current recovery are not incompatible."

Bernanke said battling long-term joblessness in the United States must be a top priority, and he called on the U.S. government to put a floor under the sagging housing market, remarks that Lagarde echoed forcefully on Saturday.

Bernanke's speech was "the shot across the bow of the government saying, 'don't keep layering expectations on the Federal Reserve, guys, you have a job to do,'" Columbia Business School Dean Glenn Hubbard said in an interview with Reuters Insider.

"The Fed is simply saying, 'We are monitoring the situation very carefully but would encourage the government, both parties, to get their act together and pass a long-term fiscal strengthening package and then perhaps short-term stimulus.

The calls from the world's economic policy elite may give some political cover to President Barack Obama, who faces a tough re-election fight next year with the U.S. unemployment rate stuck above 9 percent.

Obama is preparing for a speech after the September 5 Labor Day holiday in which he is expected to lay out proposals to boost hiring. He is reaching out to other world leaders too.

On Saturday, Obama spoke with German Chancellor Angela Merkel, and the White House said the two leaders vowed to act to shore up a global recovery that now looks at risk.

A day earlier Obama had called Lagarde to talk about fiscal policy. They agreed that the world economy needs further steps to boost growth.

Obama's potential presidential challengers, including leading Republican candidate Mitt Romney, have repeatedly blamed Obama's policies for impeding growth.

The U.S. economy grew less than 1 percent in the first half of the year and has yet to return to its pre-recession size.

EUROPE'S BANKS FACE SCRUTINY

In Europe, the biggest threat is a spreading sovereign debt crisis, and richer euro zone nations, chief among them Germany, have shown a hesitancy in picking up the tab for nations on the debt-strapped periphery.

Stress tests last month exposed the degree to which European banks are exposed to Greek and other shaky government debt, and lenders are balking at extending credit.

Lagarde and European Central Bank President Jean-Claude Trichet both said strengthening bank balance sheets is crucial.

"Although there is clarity on required policies, the uncertainty created by the political stances in both Europe and the United States poses some serious risks," Cornell University Professor Eswar Prasad said.

"Getting the policy balance right is tricky in itself; this adds a layer of uncertainty that will make it that much harder," Prasad said.

(Writing by Ann Saphir; Editing by Braden Reddall)

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Debt crisis resists assault by ECB and global leaders (AFP)

FRANKFURT (AFP) – World leaders scrambled Monday to ensure financial and economic stability as the European Central Bank bought eurozone bonds to stem a spiralling debt crisis, but chronic doubts endured and battered markets tumbled again.

Finance ministers and central bankers from the Group of 20 industrialised and emerging economies pledged to "take all necessary initiatives in a coordinated way to support financial stability and to foster stronger economic growth in a spirit of cooperation and confidence."

Their statement came after Asian stock markets suffered heavy losses and European trade saw promising gains melt by noon, with Friday's unprecedented US ratings downgrade adding to the toxic cocktail.

A sharply-worded editorial in the Chinese People's Daily -- the mouthpiece of China's Communist Party -- said Western nations threatened global well-being by "ignoring their responsibility" to the rest of the world.

The G20 stressed that its members would maintain constant contact "to ensure financial stability and liquidity in financial markets."

Earlier, the Group of Seven (G7) industrialised countries -- Britain, Canada, France, Germany, Italy, Japan and the United States -- made a similar commitment.

Sentiment on major European financial markets took a stab at resisting the downward trend before throwing in the towel and heading firmly south as well.

Economists warned that even the long-awaited ECB intervention on bond markets was no "silver bullet" and that big obstacles remained to stabilising strained public finances and putting credible eurozone defence mechanisms in place.

The G7 and G20 statements came after a whirlwind of weekend conference calls between political leaders and officials who saw storm clouds hovering over the markets.

The moves were part of a global response dictated by Standard & Poor's taking the historic step of cutting its US credit rating to AA+ from the top notch triple-A late on Friday.

As Europe struggles with its problems, global markets also want to know how Washington will reduce its more than $14 trillion debt without choking off an economic recovery since a modest US debt deal.

Late Sunday, the ECB said it would "actively implement" a programme that buys eurozone bonds, a measure which seemed to be working Monday, at least initially, as pressure eased on Italian and Spanish government debt.

That was also helped by Italy and Spain announcing measures to curb deficits and debt, and France and Germany pushing for full and rapid implementation of measures agreed at an emergency eurozone summit last month to protect the euro.

"However, we think it would be optimistic to assume that this response will be sustained or that the bond purchases will do much to address the eurozone?s fiscal crisis," Capital Economics chief economist Jonathan Loynes said.

Asian stock markets were the first to give a group reaction to the US downgrade and prospect of a serious global economic slump.

Tokyo shed 2.18 percent, Hong Kong lost 2.11 percent, Sydney fell 2.91 percent, Seoul sank 3.82 percent and Shanghai lost 3.55 percent.

In Europe, stock markets initially showed signs of resilience but later began a slide that accelerated once Wall Street opened.

London's FTSE-100 index closed down 3.39 percent to 5,068.95 points, while in Frankfurt the DAX dropped 5.02 percent to 5,923.27 points. In Paris, the CAC-40 slid 4.68 percent to 3,125.19 points.

Markets in Madrid and Milan initially bounced higher as news of the ECB's intervention, but they also got caught up in the sell off, losing 2.44 percent and 2.43 percent respectively.

Safe-haven gold surged to a record $1,715.75 per ounce, before finishing the day at $1,693. The euro slid to $1.4234 from $1.4282 on Friday.

On Wall Street, the Dow Jones Industrial Average was down 2.9 percent in afternoon trading at 11,109.93 points.

The broader S&P 500 dropped 3.8 percent to 1,153.74 points, while the tech-heavy Nasdaq Composite plunged 4.0 percent to 2,432.30 points.

Analysts said dissension among ECB governors on the bond purchases could curb the intervention and Commerzbank analyst Bernd Weidensteiner added: "In principle, the crisis can probably only be tackled by reducing deficit and stabilising debt levels. But this needs time."

IHS Global Insight chief economist Howard Archer said the ECB was building an essential firewall for Madrid and Rome but could not be content with "half-hearted measures in exercising its function as ?true lender of last resort? - the markets need to be absolutely convinced."

Deutsche Bank economist Gilles Moec said the focus would now shift to the lending capacity of the European Financial Stability Facility (EFSF), the eurozone's rescue fund that is too small to bail out Italy or Spain if they go the way of Greece, Ireland and Portugal.

But a German government spokesman said there were no plans to boost the 440-billion-euro ($625-billion) EFSF, which is supposed to take over bond buying from the ECB as soon as possible.

The ECB is the only European institution capable of acting fast and keeping at bay so-called bond vigilantes who strike fear into finance officials.

But Barclays Capital economists warned that it might be hard to buy enough government debt to keep the pressure off for long.

Goldman Sachs economists estimated the ECB would have to purchase at least 100-130 billion euros worth of Italian and Spanish bonds, compared with the total amount it had held until now of 74 billion euros.

Italy, the eurozone's third largest economy, saw its borrowing costs hit record highs last week.

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Polygamist leader's records helped get convictions (AP)

SAN ANGELO, Texas – As a prophet of his polygamist sect, Warren Jeffs documented everything he did, keeping track of every marriage he performed, every young woman he wed, and even recording his intimate moments.

It was those meticulous records — including an audiotape of what prosecutors said was him sexually assaulting a 12-year-old girl he'd taken as a bride — that helped authorities secure two child sex assault convictions against the 55-year-old ecclesiastical head of the Fundamentalist Church of Jesus Christ of Latter Day Saints.

Now, prosecutors hope those same records will help bring a life prison sentence to a man regarded by his followers as God's spokesman on Earth. The West Texas jurors who convicted Jeffs began determining his appropriate punishment Friday and were expected to hear evidence about scores of alleged crimes not mentioned during his trial.

For starters, Jeffs had 78 wives in addition to his legal spouse, and 24 of them were under age 17, said Eric Nichols, lead prosecutor for the Texas Attorney General's office, which is handling the case. Nichols also said he would show that Jeffs committed six other sexual assaults and either witnessed or performed more than 500 polygamist marriages, as well as 67 other sect marriages involving underage girls.

Jeffs spent years evading arrest, crisscrossing the country as a fugitive who eventually made the FBI's Ten Most Wanted list before his capture in 2006. He excommunicated 60 church members he saw as a threat to his leadership, breaking up 300 families while stripping them of property and "reassigning" wives and children, Nichols said.

All of that is separate from the criminal charges on which he was convicted Thursday. Jurors deliberated for 3 1/2 hours before finding Jeffs guilty of sexually assaulting two girls, ages 12 and 15, whom he'd wed during what his sect considers "spiritual marriages."

Prosecutors used DNA evidence to show Jeffs fathered a child with the older victim and played an audio recording of what they said was him sexually assaulting the younger girl. They played other tapes in which Jeffs was heard instructing as many as a dozen of his young wives on how to please him sexually — and thus, he told them, please God.

"You might have asked yourselves ... a lot of people may ask, why would someone record sex?" Nichols told jurors during closing arguments. "This individual considers himself to be the prophet. Everything he did, hour after hour, he was required to keep a record of that."

Jeffs' sect has more than 10,000 members nationwide who believe polygamy brings exaltation in heaven.

Both victims entered into unions with Jeffs willingly, and did not participate in the trial against him. But Nichols said in his closing statement that the crimes were so egregious that under Texas law, convictions did not require the victim to bring charges.

Jeffs burned through seven lawyers in six months, then insisted on representing himself after jury selection last week — turning a high-profile case into what felt at times like a surreal religious revival.

He quoted God as threatening all involved with a Biblical scourge if the case wasn't halted immediately, then later filed an unsuccessful motion to remove state District Judge Barbara Walther from the case, saying the Lord visited him in his jail cell and said Walther was afflicted from a crippling disease that would soon kill her. The judge suffered polio as a child and walks with a limp.

Jeffs stood almost completely mute during his closing argument, staring at the floor for all but a few seconds of the half hour he was allotted. He finally turned and looked toward prosecutors and the jury, most of whom avoided direct eye contact with him. "I am at peace" he mumbled, then said no more. The only noise in the courtroom was the creaking of wooden benches brimming with spectators.

On Friday, he interrupted his sentencing hearing to read in a booming voice a statement that quoted God as imploring Walther to "cease" the trial. He also asked to be excused from the hearing in protest.

Walter told Jeffs that unless he refrained from such outbursts, she would have him removed and appoint an attorney to take his place. The judge called a recess and walked out as Jeffs tried to speak.

Jeffs had claimed his religious rights were being trampled after police raided his sect's remote Texas compound, called Yearning For Zion, in April 2008. They found women wearing frontier-style dresses and hairdos from the 19th century and saw underage girls who were clearly pregnant.

The call to an abuse hotline that spurred the raid turned out to be a hoax, and more than 400 children who had been placed in protective custody were eventually returned to their families. But authorities found a small mountain of documents, including hundreds of pages of Jeffs' personal journals, which he called his "Priesthood record."

That helped bring sexual assault and bigamy charges against a dozen men from the sect. All seven of those who were prosecuted before Jeffs were convicted, and they received prison sentences of between six and 75 years.

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Polygamist leader's Texas trial set for closings (AP)

SAN ANGELO, Texas – The child sex assault case of polygamist leader Warren Jeffs is heading to closing arguments.

Jeffs, head of the Fundamentalist Church of Jesus Christ of Latter Day Saints, asked Thursday to suspend the trial for two days to call more witnesses, saying he didn't have enough time to prepare from jail.

State District Judge Barbara Walther rejected the request after quizzing Jeffs over what witnesses he planned to call. Jeffs didn't offer any names.

The lone defense witness Jeffs called, church elder JD Roundy, spent about 10 minutes on the stand Thursday discussing FLDS history after 4 1/2 hours of testimony Wednesday evening. Prosecutors objected to the entire line of questioning, saying it was irrelevant.

Jeffs is accused of sexually assaulting a 12-year-old and 15-year-old he'd taken as so-called spiritual wives.

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Obama calls Democratic leaders to White House (AP)

WASHINGTON – President Barack Obama summoned top Democratic lawmakers back to the White House Wednesday to resume negotiations on averting a potentially crippling government default, as attention focused on a new bipartisan budget plan emerging in the Senate.

The White House also indicated Obama would be willing to sign a short-term debt limit increase — something he's opposed — if it's merely a stop-gap measure to allow time for a broader plan to get into place, something that likely couldn't be finished by the Aug. 2 deadline to increase the government's borrowing limit.

Obama's meeting with House and Senate Democratic leaders, planned for mid-afternoon Wednesday, marked a partial resumption of talks that ended last week after five days straight of Obama huddling with lawmakers from both parties, with little progress to show for it. But the announcement Tuesday of a possible deal by the Senate "Gang of Six" was seized on by Obama as a possible breakthrough. Now the job ahead for the president, if he is to build momentum behind the plan, includes selling members of his own party on the cuts to entitlement programs that it embraces.

"We are in the 11th hour," said White House press secretary Jay Carney, repeating what Obama had said Wednesday. "We need to meet, talk, consult and narrow down in fairly short order what train we're riding into the station."

Carney also indicated that the president would be willing to support a short-term extension as a stop-gap measure. Carney said Obama would not support a short-term extension "absent an agreement on a larger deal."

The plan by the Gang of Six is far too complicated and contentious to advance before the Aug. 2 deadline to avoid a default that Treasury Secretary Timothy Geithner and other experts warn would roil the markets, drive up interest rates and threaten to take the country back into a recession. But the plan's authors clearly hope it could serve as a template for a "grand bargain" later in the year that could erase perhaps $4 trillion from the deficit over the coming decade.

It includes tax hikes on some that are opposed by Republicans and cuts to Medicare and other entitlements that many Democrats are against.

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Europe considers Greek default, leaders to meet (Reuters)

BRUSSELS (Reuters) – European Union leaders are poised to hold an emergency summit after finance ministers acknowledged for the first time that some form of Greek default may be needed to cut Athens' debts and stop contagion to Italy and Spain.

"There will be an extra summit this Friday," a senior euro zone diplomat told Reuters, suggesting policymakers have been seized with a new sense of urgency after markets started targeting Italian assets.

A French government source said Paris was in favor, although the timing was not yet fixed, and in Spain, European Council President Herman Van Rompuy said he had not ruled out a meeting.

Earlier, Germany's finance minister had said a second Greek rescue package could wait until September after euro zone finance ministers effectively accepted that private creditor involvement meant a selective debt default was likely, despite the European Central Bank's vehement opposition to such a move.

"We have managed to break the knot, a very difficult knot," Dutch Finance Minister Jan Kees de Jager told reporters.

Asked about whether a selective default was now likely, he replied: "It is not excluded any more. Obviously the European Central Bank has stated in the statement that it did stick to its position, but the 17 (euro zone) ministers did not exclude it any more so we have more options, a broader scope."

Participants said a buy-back of Greek debt on the secondary market and a German proposal for a bond swap for longer maturities were under consideration after a complex French plan to roll over bonds made no headway.

Both would likely be regarded by ratings agencies as a default, or at best a selective default, which although it would not necessarily cover all Greek debt and could be lifted quickly, would have major repercussions for financial markets.

The Institute of International Finance, the lobby group representing private creditors, said the EU and IMF needed to deliver a plan for Greece, including a debt buyback, within days to avoid markets "spinning out of control.

The increased likelihood of some form of default, and a lukewarm response from the IMF, hit European bank stocks and debt markets and propelled the euro sharply lower against the dollar although markets settled later.

Ten-year bond yields in Italy, the euro zone's third-largest economy, shot above six percent for the first time since 1997 but then subsided to around 5.7 percent, still at a level which bankers say will put heavy pressure on finances.

Borrowing costs at an Italian 12-month bill sale surged to their highest since the 2008 financial crisis, putting a Thursday bond auction firmly in focus.

There is now acute concern about contagion to Italy, where political tensions between Prime Minister Silvio Berlusconi and Finance Minister Giulio Tremonti have exacerbated concerns, and to Spain, the euro zone's fourth largest economy.

In Rome, Berlusconi tried to calm fears Italy could be swept into full-scale crisis, pledging to accelerate debt-cutting measures and run a primary surplus this year.

Willem Buiter, chief economist at Citi and a former UK central banker, said there was a clear spread beyond Greece, Ireland and Portugal, the three nations bailed out so far.

"We're talking a game changer here, a systemic crisis," he said. "This is existential for the euro area and the EU."

The euro fell to a four-month low against the dollar before recovering, in part because IMF Managing Director Christine Lagarde said the lender and its EU partners were not yet ready to discuss terms for a second Greek bailout.

"Nothing should be taken for granted," she told reporters in Washington.

FUNDAMENTAL SHIFT

While the finance ministers were not explicit about how they planned to tackle Greece's debt, saying only that proposals would be discussed "shortly," they acknowledged that the debt pile -- at around 160 percent of GDP -- had to be reduced.

"We stress the need to make Greek debt more sustainable," Jean-Claude Junker, the chairman of the Eurogroup of finance ministers, said after more than eight hours of talks on Monday.

Economists regarded Junker's words and the comments from other finance ministers as a fundamental shift.

"The euro area now seems to be moving more explicitly toward debt relief via EFSF-funded purchases of secondary market debt," JPMorgan economist David Mackie wrote in a research note, referring to the euro zone's 440 billion euro emergency loan fund, which as it stands would not have enough resources to bail out Italy.

"Greece will need debt relief at some point, but it is not clear it is much of a help now. More likely the shift toward debt relief is intended as an attempt to limit contagion."

The decision to call an extra leaders' summit helped counter negative market reaction to an apparent absence of hurry, after German Finance Minister Wolfgang Schaeuble said there was time to wait on Greece, with no new tranche due until September.

That lack of urgency prompted stern criticism from Greece's prime minister but the finance ministers did hint at the prospect of more fundamental steps to come.

"Ministers stand ready to adopt further measures that will improve the euro area's systemic capacity to resist contagion risk, including enhancing the flexibility and the scope of the EFSF, lengthening the maturities of the loans and lowering the interest rates, including through a collateral arrangement where appropriate," they said in a statement.

There was no indication, though, that they had broken a stalemate over how to make banks, insurers and other funds share the cost of additional funding for Athens.

A senior member of Germany's governing coalition acknowledged, however, that a debt restructuring was coming.

"We just need to ensure that it's as orderly a process as possible," he said, adding that it could come in the autumn.

Germany, the Netherlands, Finland and others want the private sector to provide at least 30 billion euros in a new package for Greece that could total 110 billion euros.

(Additional reporting by John O'Donnell, Leigh Thomas, Dan Flynn in Brussels, Silvia Westall in Vienna, Huw Jones in London, Stephen Brown in Berlin, Lesley Wroughton in Washington and Milan/Rome bureaus, editing by Mike Peacock)

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Obama calls meeting with leaders 'constructive' (AP)

By ANDREW TAYLOR and JIM KUHNHENN, Associated Press Andrew Taylor And Jim Kuhnhenn, Associated Press – 25?mins?ago

WASHINGTON – President Barack Obama described a debt-crisis session Thursday with congressional leaders as "very constructive" but said the parties were still far apart on deficit reduction proposals. He said he would reconvene the negotiators on Sunday.

Thursday's meeting came amid signals that the White House was willing to reduce costs for major benefit programs including Social Security and Medicare, while Republicans indicated they might consider new steps to raise government revenue.

"People were frank," Obama said, just moments after adjourning the one-and-a-half hour meeting with the eight lawmakers who make up the bipartisan leadership of Congress.

Obama acknowledged that the ultimate agreement will not satisfy partisans on both sides, but he said the deal would require both Republican and Democratic votes to pass Congress.

"Everyone acknowledged that pain will be involved politically on all sides," he said.

Obama met with the leaders of both parties around a table in the White House Cabinet Room as they struggled to reach a deal on raising the government's debt limit with less than four weeks remaining before a possible first-ever default on U.S. financial obligations. The Obama administration says the government needs to raise the current $14.3 trillion debt limit by Aug. 2.

Returning to the Capitol after the meeting, House Speaker said: "We had a conversation. It was productive."

While discussions on trimming the costs of entitlement programs had centered on Medicare, the health care program for older Americans, the White House is revisiting a proposal raised earlier in the negotiations to change the inflation measurement used to calculate Social Security cost-of-living adjustments, thus reducing annual increases, officials said Thursday.

The White House has also said the president is aiming for deficit reduction closer to $4 trillion over 10 years — an ambitious number that would nearly double the roughly $2 trillion that had been at the center of negotiations.

Democratic and Republican officials familiar with the discussions said Thursday that Social Security was in the mix for potential cost savings. Reintroducing the retirement program to the talks is likely to cause anxiety among congressional Democrats who have insisted that Social Security does not contribute to the nation's deficit problems. White House spokesman Jay Carney said the same after Obama spoke.

The officials spoke on the condition of anonymity because of the sensitivity of the talks. They stressed that no aspect of the deal had been accepted by either side.

Obama ignored a question about Social Security during a photo session at the beginning of the meeting. Carney also declined to discuss options before the negotiators.

One official said that an option under discussion would allow Republicans to make a commitment to overhaul and simplify the tax system, an effort that would lower individual and corporate tax rates while closing loopholes, ending some deductions and limiting other tax subsidies. Those changes could generate tax revenue and were a central element of a deficit reduction plan proposed by a bipartisan commission early this year.

Some Republicans argue that a simplified tax system would increase economic activity and that in itself would result in increased tax revenue.

Amid media reports Thursday of Social Security's inclusion in the debt-cutting talks, Obama spokesman Carney pushed back.

"There is no news here — the president has always said that while Social Security is not a major driver of the deficit, we do need to strengthen the program," Carney said, providing that any such effort "doesn't slash benefits." His statement did not directly address the possibility of reducing annual Social Security increases by changing the inflation adjustments.

Later, while briefing reporters, Carney added: "We have not put restrictions on what is brought into the room or put on the table."

Two Democratic officials allied with Obama said the president believes it would be easier to win bipartisan support in the House and Senate for a deal that embraces larger deficit cuts closer to the $4 trillion over 12 years that Obama proposed in April.

The officials, speaking on the condition of anonymity to discuss the private negotiations more freely, said the precise number was still in flux, but they said Obama would be making the case for more rather than less deficit reduction in his discussions with congressional leaders Thursday. The negotiations were the first official sit-down since last month, when House Majority Leader Eric Cantor, R-Va., left talks that had been led by Vice President Joe Biden, citing an insistence by Democrats on raising taxes.

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Obama says talked with leaders on debt, cites progress (Reuters)

WASHINGTON (Reuters) – President Barack Obama said on Tuesday that he spoke over the weekend with both Democratic and Republican congressional leaders on their impasse over the U.S. debt and deficits and that the discussions are yielding progress.

Obama also told reporters he opposes a short-term deal to raise the nation's debt limit. He said a short-term debt-limit increase would amount to an effort "kick the can down the road."

(Editing by Sandra Maler)

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Obama meets Senate leaders, keeps debt talks alive (Reuters)

WASHINGTON (Reuters) – President Barack Obama sought on Monday to narrow the gap between his Democrats and Republicans over raising the debt ceiling, but neither side sounded inclined to compromise ahead of the talks.

Obama met Senate Democratic leader Harry Reid for a little over 30 minutes at the White House and is scheduled to sit down with Senate Republican leader Mitch McConnell at 5 p.m. (2100 GMT).

Reid left the White House without talking to reporters and it was not immediately clear if the ground covered in the meeting would be made public.

Time is running out ahead of an August 2 deadline to raise the borrowing limit. Administration officials said the most important thing was to keep both sides talking, which was why negotiations had escalated to the president.

Talks led by Vice President Joe Biden broke down last week over Democrats' demands to include raising tax revenues alongside spending cuts to lift the $14.3 trillion borrowing limit before the government runs out of cash on August 2.

Failure to act risks the United States defaulting on its financial obligations, which could push the country back into recession. Obama is also trying to ease public concern over his handling of the deficit, which is likely to be a key topic as he seeks re-election next year.

The federal deficit stands at $1.4 trillion, among the highest levels relative to the economy since World War Two.

McConnell has stuck firmly to his party's line that revenue-raising measures were off the table.

"America does not face a debt crisis because we tax too little, but because Washington spends too much. And tax hikes can't pass the Congress. Not only is there bipartisan opposition, the consequences of massive new tax hikes would be fewer jobs," he wrote in an opinion piece for CNN on Monday.

Obama met with House of Representatives Speaker John Boehner, a Republican, and House Minority Leader Nancy Pelosi, a Democrat, last week. The House is not in session this week and many members, including Boehner, are back in their districts.

AVOID STOP-GAP DEAL

The debt ceiling needs to be raised by around $2.4 trillion to ensure that the government has enough money to keep functioning through the November 2012 election.

McConnell has floated the idea of a short-term funding agreement to win a couple of extra months of funding, but the administration said this should not be necessary.

"I don't see any reason to doubt that we'll be able to do a long-term extension of the debt limit accompanied by very serious deficit reduction," a senior administration official said. "We should have a long-term extension that gives people security and confidence."

Republicans say they want spending cuts to equal any increase in the limit, but the administration is pushing for a package that also includes revenues. Obama favors $3 dollars in spending cuts for every extra dollar in revenue.

Democrats are aiming at tax subsidies for oil and gas companies, so-called "carried interest" tax breaks for hedge fund managers, and loopholes that favor corporate jets.

Obama has also backed limiting tax deductions for wealthier Americans which the White House says targets millionaires and billionaires.

But Republicans contend it would also hit hundreds of thousands of small business owners and raise taxes of many American families by limiting deductions for things like mortgage interest payments.

The administration wants to frame the debate as Republicans protecting tax breaks for the rich at the expense of older Americans, and says cuts in spending must also include the Defense Department budget that Republicans traditionally protect.

"Any package of any significance that passes is going to have to have significant spending reductions, including reductions in Pentagon spending. You are going to have some of these tax loopholes for the wealthy and special interests closed," said a senior administration official.

(Editing by Vicki Allen)

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