Tropical Storm Lee lumbers toward Louisiana coast (Reuters)

NEW ORLEANS (Reuters) – Slow-moving Tropical Storm Lee strengthened as it lumbered toward the Louisiana coast on Saturday, bringing torrential rains that will put the flood defenses of low-lying New Orleans to the test.

The storm is expected to reach the Louisiana coast later on Saturday and bring up to 20 inches of rain to southeast Louisiana over the next few days, including to New Orleans, which was battered by Hurricane Katrina in 2005, the U.S. National Hurricane Center said.

The center of Lee was 45 miles southwest of Morgan City, with maximum winds of 60 miles per hour, the hurricane center said. Lee's winds were expected to stay below the 74 mph threshold of hurricane strength.

But the prospect of flooding in low-lying New Orleans evoked memories of Hurricane Katrina, which flooded 80 percent of the city, killed 1,500 people and caused more than $80 billion in damage. Half of the city lies below sea level and is protected by a system of levees and flood gates.

The city's extensive levee system is capable of processing about one inch of rainfall per hour, but the storm's slow-moving nature could bring challenges, officials said.

EVACUATIONS

Low-lying parishes around New Orleans saw rising waters, which covered some roadways in Plaquemines and St. Bernard parishes, but no homes or businesses were threatened. Some residents in Jefferson Parish were ordered to evacuate.

Periodic breaks in the rainfall allowed the city's giant pumps to catch up with the water flow and clear standing water, said Jefferson Parish President John Young.

"Everything looks good," Young told local television. "The pumps are keeping up with the water. We are getting some street flooding."

Lee will weaken once it hits land, but it will lose strength more slowly than normal due to the marshy nature of the Louisiana coast, the hurricane center said.

Lee's northeasterly track could bring heavy rains to Mississippi, Alabama, Georgia, Tennessee and the Appalachian Mountains next week.

Major offshore producers like Royal Dutch Shell, Exxon Mobil Corp and BP Plc shut down platforms and evacuated staff earlier this week.

Shell began returning workers to its offshore Perdido platform in the western Gulf of Mexico on Saturday.

About half the U.S. offshore oil production, all based in the Gulf of Mexico, and a third of offshore gas production were shut as of Friday, according to the U.S. government. Most of that output should quickly return once the storm passes.

Louisiana Governor Bobby Jindal on Friday warned that heavy rains, substantial winds and tidal surges from the Gulf of Mexico could produce flash flooding in parts of New Orleans throughout the Labor Day holiday weekend.

Meanwhile, Hurricane Katia weakened to near tropical storm strength as it churned in the Atlantic Ocean, 485 miles east-northeast of the northern Leeward Islands. Katia had maximum winds of 75 mph, moving northwest at 10 miles per hour.

(Additional reporting by Erwin Seba in Houston, Writing by Chris Baltimore; Editing by Vicki Allen)

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No consensus as Europe limps toward Greece summit (Reuters)

BRUSSELS/PARIS (Reuters) – European government officials and commercial bankers struggled to reconcile competing proposals for a second bailout of Greece on Monday, just three days before a summit meeting called to prevent the crisis from spreading through the region.

French government spokeswoman Valerie Pecresse said she believed the summit of the euro zone's 17 national leaders scheduled for Thursday in Brussels would agree on a rescue of Greece, supplementing a 110 billion euro ($154 billion) bailout launched in May last year.

But after three weeks of preparatory talks, it was unclear how a consensus could be reached on a way for private owners of Greek government bonds -- banks, insurers and other investors -- to contribute to the bailout by taking cuts in the face value of their holdings.

Imposing a small tax on all euro area banks is under active consideration as a possible alternative to more risky forms of private sector involvement, a source familiar with the talks said, confirming a German media report.

The source also said officials were considering measures to try to prevent the fallout from the Greek crisis from damaging financial markets globally.

Fears that the rescue of Greece might fail, leading eventually to a disorderly debt default, pushed the euro down against other currencies and bond yields of highly indebted euro zone governments rose. Italy's 10-year yield climbed over 0.2 percentage point to a euro-era high.

Paul de Grauwe, a professor of international economics at Leuven University in Belgium who has informally advised European Commission President Jose Manuel Barroso, said politicians had delayed taking decisive action on Greece for so long that their options were narrowing fast.

"I'm afraid to hope. I still hope, yes, but I'm not optimistic," he said.

"We've had solutions in the past, but we haven't grasped them. Now it's too late for some of those solutions to work anymore; the opportunity has been lost."

RANGE OF SCHEMES

Officials are wrestling with a range of proposed schemes for Europe's bailout fund, the European Financial Stability Facility, to finance a voluntary buy-back or swap of Greek bonds, or possibly both. The schemes would be conducted at a discount to the bonds' face value, helping to reduce Greece's 340 billion euro mountain of sovereign debt.

But all of the schemes could face technical and legal obstacles, in some cases requiring the approval of national parliaments in the euro zone, and they risk fuelling market instability if credit rating agencies respond by declaring Greece in limited default.

The source familiar with the negotiations said the tax on banks, which might substitute for those schemes, could raise 10 billion euros a year, yielding 30 billion euros over three years -- the sum which Germany and other countries have set as the benchmark for the private sector's contribution.

Asked about the apparent unfairness of making banks not exposed to Greek debt share the burden with those that do have exposure, the source said the tax could be structured to fall mainly on investors with the most exposure. He did not say how.

"This has been discussed for a few weeks but never really got momentum. Lately it's been getting a bit more. The Germans say they are not against it. It would be a form of private sector involvement without the collateral damage of triggering a credit event or a selective default," the source said.

But any contribution by the private sector is unlikely to be nearly enough to solve Greece's problem. Analysts have estimated its debt would need to be roughly halved, to 80 percent of gross domestic product, to make it manageable in the long run.

A bond swap might have the most impact.

But a European Union official source told Reuters that any agreement on a swap this week would probably be quite small, merely paving the way for a debate on a bigger restructuring of Greek debt that would have to take place in a few months' time.

"What we're talking about down the road is the need for a massive reduction in the debt burden, and they are just not ready to do that yet," said Guntram Wolff, deputy director of the Bruegel think tank and previously a senior economist at DG Ecfin, the European Commission unit dealing with the crisis.

"It will require some form of substantial debt restructuring and you have to see who is going to take the hit, will it be the taxpayers or will it be the banks? To carry out such a move you need to prepare, and they don't have the time to prepare before Thursday."

BAILOUT

As part of the second bailout, officials have also been looking at other measures to help Greece including up to 60 billion euros of additional emergency loans from European governments and the International Monetary Fund; steps to recapitalize Greek and European banks; and ways to stimulate Greek economic growth.

EU sources said there was a basic agreement on extending the maturities and lowering the interest rates for bailout loans extended to Greece, Ireland and Portugal. Greece's EU loans have maturities of about 7.5 years with a rate of 4 percent; their length might be doubled or even quadrupled, and the rate cut by at least 0.5 percentage point.

But de Grauwe said the mood of financial markets was now so negative that such a step might not help weak euro zone states regain the ability to fund themselves.

"If that was to be a solution, it's a solution we should have implemented months ago, when it would have worked."

There has also been talk of expanding the 750 billion euro bailout facility which the EU and the IMF created last year as the debt crisis erupted. The EU source said there probably would not be enough time to agree on the idea this week.

The source familiar with the negotiations said that to reassure global markets, governments were considering proposals to make the EFSF more flexible by, for example, allowing it to recapitalize banks or provide precautionary credit lines.

Euro zone leaders may also issue a statement declaring Greece is a unique case, to try to convince private investors they will not be called on to help pay for bailouts of countries such as Ireland and Portugal. After recent credit rating downgrades, however, many investors are assuming the worst.

IMF

Another concern is that the IMF and other major governments around the world may lose patience with Europe.

German newspaper Die Welt quoted diplomatic sources as saying the IMF was angered by Europe's unsuccessful crisis management and that "influential parties" in the Fund wished not to take part in further bailouts of Greece. It did not elaborate.

U.S. Treasury Secretary Timothy Geithner said on Monday that Europe had to act more forcefully to contain risks in its banking sector, which is heavily exposed to Greek, Irish and Portuguese sovereign debt.

Former U.S. Treasury Secretary and White House adviser Lawrence Summers, writing in a column contributed to Reuters on Sunday, said Europe should move much more aggressively than it had done so far to prevent the Greek crisis from damaging both the region's single currency and the global economic recovery.

He recommended steps including sharp cuts in interest paid on bailout loans, allowing countries to buy European Union guarantees for their issues of new debt, and a menu of options for private investors to become involved.

"It is to be hoped that European officials can engineer a decisive change in direction but if not, the world can no longer afford the deference that the IMF and non-European G20 officials have shown toward European policymakers over the last 15 months," Summers wrote.

Many economists think some form of regional guarantee for countries' debt along the lines suggested by Summers -- or perhaps even the issuance of joint euro zone bonds -- may ultimately be the only way to emerge from the crisis without one or more weak states being forced out of the bloc.

But Germany has shown no appetite for such a solution, which in any case would require a complex revision of the EU treaty. Berlin is concerned that a common bond would provide no meaningful incentives for national governments to pursue prudent policies.

(Writing by Andrew Torchia; Editing by Ruth Pitchford)

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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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