Debt crisis moves to Senate, deadlock persists

WASHINGTON - Democrats sought to forge a last-ditch compromise with Republicans on Friday by offering a concession to avoid a crippling default, but a bitter divide remained before Tuesday's deadline to raise the country's debt ceiling.

The Republican-controlled House of Representatives approved a deficit-cutting plan and the Democratic-led Senate quickly rejected it, moves that underscored the ideological differences but also opened the way to start negotiating a deal.

The back-to-back votes broke weeks of political inertia in efforts to lift the $14.3 trillion debt limit by Tuesday after which the world's largest economy will be unable to pay all of its bills, the government says.

But hopes for a quick resolution faded as the Senate adjourned for the evening after a round of parliamentary maneuvering and finger-pointing, setting the stage for a tense weekend in Washington.

Senate Democratic Leader Harry Reid ceded some ground late on Friday when he revised his own deficit-reduction proposal to incorporate parts of a "backup plan" first proposed by the Senate's top Republican, Mitch McConnell.

The new version would essentially give President Barack Obama the authority -- and the blame -- to raise the debt ceiling in three stages to cover borrowing needs through the 2012 elections when he is running for a second term.

Obama and his Democrats had hoped to avoid multiple votes before the election.

Despite the pressing deadline, progress toward an agreement did not appear imminent.

"They are refusing to negotiate with us and all they do is talk," Reid told reporters after the Senate vote, which like the House tally hewed to party lines.

Delays and procedural hurdles will still make it all but impossible for Congress to strike a deal and send it to Obama's desk before Monday night at the earliest, injecting further uncertainty into already rattled global financial markets.

Even if a late deal can be struck, the United States risks losing its top-notch AAA credit rating, a once-unthinkable event for world financial markets that would push up the U.S. cost of borrowing while the economy is still struggling.

World leaders have been stunned by the dysfunction in Washington. World Bank President Robert Zoellick on Friday said the United States was playing with fire.

America's largest foreign creditor, China, has repeatedly urged Washington to protect its dollar investments and its state-run news agency on Friday said the United States had been "kidnapped" by "dangerously irresponsible" politics.

Wall street ended its worst week in a year on Friday. The dollar plunged to a record low against the Swiss franc, which is viewed by investors as a safe haven currency.

In short-term lending markets, investors dumped holdings over fears about the talks, driving rates on Treasury debt that matures in August to six-month highs.

The Treasury warned Wall Street firms it might delay or cancel a major round of bond sales if Congress does not raise the debt limit in time.

Both sides in Congress have been at impasse for weeks with lawmakers locked in a blame game that has raised the risk of a potentially devastating default, which could plunge America back into recession and trigger economic turmoil globally.

Developments gathered pace on Friday when Republicans pushed a deficit-cutting plan through the House by a vote of 218-to-210 after the party's leaders reworked the bill to appease anti-tax conservatives in their ranks.

The legislation, denounced earlier by Obama who had admonished lawmakers to stop wasting time and find a way "out of this mess," was always doomed to defeat in the Senate where all of Obama's Democrats had vowed to vote against it.

The Senate defeated the measure, 59-to-41.

"We are moving a bit closer," said Axel Merk, president of Merk Investments in Palo Alto, California. "We'll get an agreement, ultimately, but the drama is going to continue to play out."

POLITICAL MANEUVERING

Senate Democrats had hoped to work out a compromise with Republicans on Friday but said McConnell refused to negotiate.

Immediately after defeating the House bill pushed by Republican Speaker John Boehner, Reid sought to sway some Senate Republicans by offering a revised version of his plan that included elements from one McConnell proposed weeks ago.

Through a complex legislative procedure, Obama would be able to increase the debt ceiling by $2.4 trillion in three stages but Republicans would have political cover by not having to explicitly approve each case. The White House has not ruled out accepting such a provision.

Republican aides said McConnell wants to negotiate directly with the White House to ensure that Democrats will be on board with any final deal.

Reid will find out how many Republicans back his plan in a procedural vote scheduled for 1 a.m. EDT (0500 GMT) on Sunday. If all 53 Democrats back the plan they will need at least seven Republicans to clear the 60-vote threshold.

A vote on its final passage, which requires a simple majority, could come on Monday morning.

Boehner's failure on Thursday to quell a rebellion among Tea Party-affiliated conservatives in his party exposed a rift among Republicans that has hindered efforts to reach a deal.

But Boehner brought enough of his recalcitrant Republicans onboard on Friday with a retooled plan that included a requirement for Congress to pass a balanced budget amendment to the Constitution and send it to the states for ratification, a long-time core demand of fiscal conservatives.

Boehner's two-step plan would have cut spending initially by about $900 billion and lift the debt ceiling only enough to last a few months. That would mean a re-run of the acrimonious debate which Obama is determined to avoid at a time when he will be deeper into 2012 re-election campaign.

Reid has said a short-term solution is unacceptable and is pushing for $2.2 trillion in cuts over 10 years.

Ratings agency Moody's signaled it probably will not downgrade the United States' triple-A credit rating immediately, even if there is no deal to raise the debt ceiling, but a cut could come in the medium term. It said the United States would still have enough money to pay its debts to bondholders after Tuesday.

Rival ratings agency Standard & Poor's has warned it could cut the rating soon if there is no deal to address the underlying budget problems.

(Additional reporting by Rachelle Younglai, Donna Smith, Lily Kuo, Margaret Chadbourn, Laura MacInnis, Tabassum Zakaria in Washington and Karen Brettell, Steven C. Johnson and Jennifer Ablan in New York; Writing by Stuart Grudgings and Matt Spetalnick)


Source : http://www.reuters.com

Read More

Republicans race to revive debt plan

WASHINGTON - Republican leaders will scramble to rescue their budget deficit-cutting plan on Friday after conservatives mounted a rebellion that heaped uncertainty on efforts to avert a catastrophic debt default.

House of Representatives Speaker John Boehner's failure to round up enough support for his plan on Thursday exposed a rift in the Republican Party that is hampering efforts to reach a compromise to raise the U.S. debt ceiling before a Tuesday deadline.

President Barack Obama says that unless Democrats and Republicans strike a deal, the government will start being unable to pay all its bills on August 2, a once unthinkable prospect that is increasingly unnerving investors.

With only four full days left, the Treasury could unveil as early as Friday an emergency plan explaining how the government would function and pay its obligations if Congress does not agree to raise its borrowing limit from $14.3 trillion.

Despite warnings of dire economic consequences, lawmakers appear as far apart as ever as conservative Republicans demand an end to what they say is out-of-control government spending and Democrats seek to protect spending on social programs.

In a sign of growing international alarm over the U.S. impasse, China's state-run news agency sharply criticized U.S. politicians, saying the world's largest economy has been "kidnapped" by "dangerously irresponsible" politics.

As the largest foreign creditor to the United States, Beijing has repeatedly urged Washington to protect its dollar investments, which are estimated to account for about 70 percent of its $3.2 trillion in foreign exchange reserves.

Boehner's plan, which would cut spending by about $900 billion and raise the debt ceiling for a few months, is sure to be rejected by the Democratic-controlled Senate but could factor into an eventual compromise.

His inability to win quick passage in the Republican-run House could weaken his position at the bargaining table.

Top Senate Democrat Harry Reid wants to raise the debt ceiling by enough to kick the crisis beyond the November 2012 presidential election.

Reid indicated late on Thursday that he may advance his own bill, which cuts spending by $2.2 trillion over 10 years, in the Senate rather than use Boehner's proposal as the basis for a compromise.

REPUBLICAN MEETING

House Republicans were due to meet at 10 a.m. (1400 GMT) on Friday to discuss a way forward after last-minute arm-twisting by Boehner failed to overcome opposition within his party and forced him to abandon a planned vote on Thursday night.

The setback raised doubt over his ability to deliver enough votes in any compromise deal with the Senate.

Lawmakers continued to throw blame at each other, with Democrats accusing Republicans aligned with the fiscally conservative Tea Party movement of holding Americans hostage to their vision of small government.

"Republicans have taken us to the brink of economic chaos. The delay must end now so we can focus on the American people's top priority: creating jobs and growing the economy," House Democratic Leader Nancy Pelosi said in a statement.

Tea Party lawmakers say they are justified in taking a strong stand after being elected last year on a promise to slash spending.

Fears of an unprecedented default by the world's biggest economy and the more likely scenario of America losing its top-notch credit rating are gnawing at markets, hitting stocks, undermining the dollar and fueling a move to safe havens.

Further market turbulence appeared likely on Friday. After the announcement that the House would not vote on Thursday, the dollar fell to a four-month low of 77.50 against the Japanese yen. U.S. stock futures were off 0.6 percent, pointing to a weaker start on Wall Street.

Veterans of U.S. legislative battles voiced confidence that a deal will be reached as Congress works through the weekend and feels the heat from jittery financial markets and ordinary Americans frustrated by the Washington gridlock.

The main sticking point between Republican and Democratic leaders is that Boehner's two-step plan would only extend the government's borrowing for a few months. Obama wants the debt ceiling raised beyond the November 2012 elections.

Without a deal, Obama could be forced to consider taking emergency steps to ward off a default even though the White House has said Congress must come up with a solution.

Among his options are invoking an obscure constitutional amendment to raise unilaterally the debt ceiling or for the Treasury to prioritize payments, choosing between paying bond holders or Social Security pension recipients, for example.

"I think they should be exploring all their legal options," Democratic Representative Chris Van Hollen said on Thursday night.

Even if the administration were to implement some of the options, the debt crisis could still trigger turmoil in financial markets.

(Writing by Stuart Grudgings; editing by Eric Beech)


Source : http://www.reuters.com

Read More

Israeli orchestra confronts taboo at Wagner shrine

BAYREUTH, Germany - The Israel Chamber Orchestra will play a work by Adolf Hitler's favorite composer Richard Wagner in Germany on Tuesday, challenging a seven-decade taboo in their homeland.

Israeli ensembles rarely play Wagner because of the seminal 19th century composer's anti-Semitism and the appropriation of his music by by the Nazis, calling it insensitive to Holocaust survivors.

But orchestra conductor Roberto Paternostro said on Sunday it was time to separate Wagner's worldview from his music.

"Wagner's ideology and anti-Semitism was terrible, but on the other hand he was a great composer," he told Reuters. "The aim is in the year 2011 to divide the man from his art."

The orchestra will play Wagner's Siegfried Idyll, an orchestral piece, in Bayreuth, Germany, famous for its annual Wagner opera festival in July and August.

It will be the first time an Israeli orchestra plays Wagner in Germany.

"It was a very difficult and rocky path to get to this point," Paternostro said earlier at a news conference. "There wasn't a moment when I had any doubts about this project."

"It was my greatest conviction to bring together these two sides -- Israel and Wagner," said Paternostro, who is Jewish and whose mother and other relatives were Holocaust survivors. "For me it wasn't much of a problem."

Attempts over the years by some musicians in Israel to perform Wagner's music have caused audience members to walk out in protest and have triggered heated public debate.

Wagner is also taboo on state-owned media in Israel which largely keep his work off the air.

TIME TO CONFRONT WAGNER

"I know that in Israel this isn't accepted," Paternostro said. "But many people have told me,'it's time we confront Wagner', especially those in the younger generation."

Still, not enough time has passed for a performance in Israel, he said. The orchestra did not even rehearse the music in the country.

Even though Wagner died half a century before Hitler rose to power, the Nazi dictator was a fervent admirer and drew on the composer's writings in his own theories on Germanic racial purity.

Aside from anti-Semitic overtones in some of his operas, Wagner also penned a number of polemics raging against the corruption of music and the "German spirit" by Jews.

The unofficial ban on Wagner predates Israel's creation in 1948. The Israel Philharmonic under its former name, the Palestine Orchestra, imposed it in 1938 after Nazi attacks on Jews in Germany.

Dan Erdmann, a clarinetist in the Israel Chamber Orchestra, said his fellow musicians understood the history that is linked to Wagner's music.

"However, the conflicts and emotions associated with the history of Wagner are exactly those which make it so special for us," he said.

The orchestra's performance is part of a fringe festival here linked to the annual Wagner opera festival that attracts thousands of opera fanatics and celebrities each year.

They will also play a piece by Israeli composer Zvi Avni and music by German-born Felix Mendelssohn and Austrian-born Gustav Mahler, two of the most prominent Jewish-born composers.

(Editing by David Cowell)

Source : http://www.reuters.com

Read More

Amazon revenue, spending surges; stock jumps

SAN FRANCISCO  - Amazon.com Inc will use its surging revenue to boost growth and drive expansion into areas such as Web content and cloud computing rather than boost its margins.

The largest Internet retailer reported a jump in quarterly revenue on sales of its Kindle electronic reader and other electronics and forecast better-than-expected revenue for the current quarter, sending its shares up more than 6 percent late on Tuesday.

Amazon benefited from growth in e-commerce, though margins continued to be pressured by heavy spending on distribution, technology and digital content.

The company is investing to build warehouses and distribution to support rapidly growing e-commerce, its main business.

It's also spending heavily on servers and data centers for its cloud computing business Amazon Web Services, while buying more digital content to bolster media offerings, such as streaming video.

This spending has dented profit margins in recent quarters. Analysts and investors are mostly happy to see such investment by the company -- as long as it winds down at some point and lays the foundation for future profit increases.

"They're sacrificing near-term profitability for longer-term revenue growth," said Michael Souers, specialty retail analyst at S&P Equity Research. "As long as they are able to transform growth into profits in the future, investors will be satisfied. The chances are strong."

Amazon on Tuesday reported a 51 percent rise in second-quarter revenue to $9.91 billion, surpassing Wall Street's expectations for $9.4 billion.

The company forecast third-quarter sales of $10.3 billion to $11.1 billion, compared with the average forecast for $10.35 billion, according to Thomson Reuters I/B/E/S.

Second-quarter net income fell to $191 million, or 41 cents per share, from $207 million, or 45 cents per share, in the same period a year earlier. Analysts expected 35 cents per share for the latest second quarter, according to Thomson Reuters I/B/E/S.

The operating profit margin fell to 2.0 percent from 4.1 percent a year earlier.

Operating income is expected to be between $20 million and $170 million in the third quarter, the company estimated. The guidance includes about $180 million of stock-based compensation expense and amortization of intangible assets. It also assumes no other acquisitions or investments will close in the quarter.

That forecast suggests Amazon's third-quarter pro-forma operating margin will be 1.8 percent to 3.2 percent, according to Aaron Kessler, an analyst at ThinkEquity. That's below his previous estimate.

"Amazon's willing to give up short-term profits for long-term growth and more market share," Kessler told Reuters. "But ultimately they are managing the business for shareholders. We're expecting modest margin expansion next year. Investors would like to see some return on these investments starting next year."

The company is expected to introduce a tablet computer later this year that would compete with Apple Inc's Ipad.

Souers reckons thin third-quarter margins suggest Amazon is spending heavily on this new tablet.

"Longer term this is the best move they can make. The world is shifting toward digital from physical media and a tablet will help them cement a position in streaming content like movies and music," the analyst said.

Amazon Chief Financial Officer Tom Szkutak declined to comment on whether the company was working on a new tablet computer. However, he pledged to keep spending and investing to support growth and new businesses.

Amazon said it spent $941 million on so-called "fulfillment centers" -- warehouses or logistics centers -- in the second quarter, compared to $582 million a year earlier. Technology and content costs totaled $698 million in the latest period, versus $408 million in the same period of 2010.

"We're investing in the conversion from physical to digital and we feel very good about the traction we're getting there," he said.

Szkutak also stressed that the company is focused on cash flow and high returns on investment, rather than profit margins.

Amazon's main online retail business is growing so fast that the company needs to spend on a lot of new distribution capacity, he explained during a conference call with analysts.

Amazon has announced 15 new fulfillment centers so far in 2011 and the company will unveil more before the end of this year, he noted.

Amazon Web Services -- which hosts computing for corporate clients over the Internet -- accounts for a "big piece" of Amazon's current and future spending, because it's growing so fast, the CFO added.

Amazon shares, which have risen about 18 percent since the start of 2011, gained 6.1 percent to $227.35 in after-hours trade.

The company said sales in Worldwide Electronics and Other General Merchandise, which includes the Kindle e-reader, computers, cameras and other consumer electronics, jumped 69 percent to $5.89 billion in the second quarter.

Excluding currency fluctuations, sales rose 62 percent.

"That's very strong," said Scot Wingo, chief executive of ChannelAdvisor, a software provider that helps retailers sell more online through channels including Amazon and eBay Inc.

"E-commerce in general is growing at 10 percent to 14 percent, so Amazon continues to gobble up market share." Wingo owns Amazon shares, and eBay is an investor in ChannelAdvisor.

At some point, such growth will taper off and this is when Amazon will be able to cut back on spending and increase profitability, S&P's Souers said. He's expecting margins to increase "significantly" in coming years.

(Writing by Brad Dorfman; Additional reporting by Eunju Lie in Chicago and Noel Randewich in San Francisco; Editing by Bernard Orr, Phil Berlowitz)

Source :  http://www.reuters.com

Read More

Analysis: QE3 may do markets more harm than good

 

LONDON - There may be a point at which global investors get indigestion from U.S. money printing.

A fresh round of U.S. monetary easing may even do more harm than good for long-term investors as another flood of easy money into fast-growing emerging economies risks refueling oil and commodity price inflation, sapping consumption and growth.

Prospects for a third round of the Federal Reserve's quantitative easing program (QE3) grew this month after Chairman Ben Bernanke said the central bank was prepared to ease further if economic growth and inflation falter again.

Nearly in one in two fund managers surveyed by Bank of America Merrill Lynch this month said QE3 was likely.

The temptation for risk-loving investors is to rub their hands with glee. Traditionally risky or high-yielding assets such as global equities, energy and commodities and emerging markets surged in the months after the Fed gave the green light for Round Two of QE -- which involved $600 billion in new money in the form of Treasury debt purchases and which ended last month.

But the impact on the U.S. economy and the labor market has been less obvious, given that growth has slowed significantly into 2011 -- at least partly because higher energy costs have undermined consumer spending everywhere. Asset prices, as a result, have retreated sharply again since April's peaks.

This has given rise to a debate about whether QE3 works. If it doesn't give a sustained boost to financial markets and is ambiguous for the real economy, is there any point?

"We have a negative opinion of QE2, and believe QE3 could very well turn out to be ineffective at best, and counter-productive at worst," said Stephen Jen, managing partner of London-based hedge fund SLJ Partners.

"If we are right, QE will be self-defeating in that the more the Fed eases, the more commodity prices rise, which erodes the capacity of consumers to spend on non-energy products and services."

Since Bernanke unveiled the Fed's QE2 bond buying program in a speech in Jackson Hole in August last year, Brent crude oil have risen 58 percent, while the benchmark CRB commodities index has gained nearly 30 percent.

Developed and emerging stock indexes are both up around 20 percent since that speech but they are coming off their April highs. On the year both of them are largely flat.

"My best guess is that there will be a few weeks of positive reaction, followed by a sell-off, as investors realize the circular and pointless logic of (the argument that) QE2 could lead to permanent increases in economic activities," Jen said.

UNINTENDED CONSEQUENCES

Some advocates say quantitative easing works best by revaluing financial assets so that there will be a positive wealth effect for U.S. consumers, encouraging them to start spending again. The Fed argues that it boosts credit in a similar way to an orthodox easing by directly lowering long-term benchmark borrowing costs.

But the effect of ample dollar liquidity spreads beyond the United States, largely because emerging economies either are pegged to the dollar or have inflexible exchange rate policies. Even economies that do allow their currencies to appreciate are at risk of asset bubbles as cheap money seeks higher yields.

This means these fast-growing emerging economies effectively import the Fed's monetary easing and lift their demand for oil and commodities, whose prices also tend to rise on a weaker dollar.

The other problem is that easy money chasing high-yielding assets drives hot money into the emerging world, fans inflation and triggers monetary tightening which in turn slows growth -- creating a vicious circle.

"If QE3 is simply a repeat of QE2, I don't think it has a positive impact that has sustainability," said Bob Janjuah, head of tactical asset allocation at Nomura.

"(It) will make a commodity problem even worse. It won't help the economy but create a much bigger inflationary pressure.

QE3 will force one globally positive growth area, emerging markets, to slow down because of inflation ... We could end up with a negative effect."

Janjuah's preconditions for QE3 are a rise in the U.S. unemployment rate above 10 percent and a 20-25 percent fall in the S&P 500 index.

As benefits wane, many fear the cost of repeated QE operations could be self-defeating in that more money printing fuels inflation, debases the currency and ultimately raises the government's borrowing costs.

According to Jen, the Fed's balance sheet has grown by 10 points to 18 percent of GDP in two years - a similar scale to Japan's in the five years to 2006.

"The marginal impact of QE is decreasing progressively... The weight of debt on Fed balance sheet is increasing indeed," said Didier Saint-Georges, member of the investment committee at private asset manager Carmignac Gestion in Paris.

(Editing by Ruth Pitchford)

A fresh round of U.S. monetary easing may even do more harm than good for long-term investors as another flood of easy money into fast-growing emerging economies risks refueling oil and commodity price inflation, sapping consumption and growth.

Prospects for a third round of the Federal Reserve's quantitative easing program (QE3) grew this month after Chairman Ben Bernanke said the central bank was prepared to ease further if economic growth and inflation falter again.

Nearly in one in two fund managers surveyed by Bank of America Merrill Lynch this month said QE3 was likely.

The temptation for risk-loving investors is to rub their hands with glee. Traditionally risky or high-yielding assets such as global equities, energy and commodities and emerging markets surged in the months after the Fed gave the green light for Round Two of QE -- which involved $600 billion in new money in the form of Treasury debt purchases and which ended last month.

But the impact on the U.S. economy and the labor market has been less obvious, given that growth has slowed significantly into 2011 -- at least partly because higher energy costs have undermined consumer spending everywhere. Asset prices, as a result, have retreated sharply again since April's peaks.

This has given rise to a debate about whether QE3 works. If it doesn't give a sustained boost to financial markets and is ambiguous for the real economy, is there any point?

"We have a negative opinion of QE2, and believe QE3 could very well turn out to be ineffective at best, and counter-productive at worst," said Stephen Jen, managing partner of London-based hedge fund SLJ Partners.

"If we are right, QE will be self-defeating in that the more the Fed eases, the more commodity prices rise, which erodes the capacity of consumers to spend on non-energy products and services."

Since Bernanke unveiled the Fed's QE2 bond buying program in a speech in Jackson Hole in August last year, Brent crude oil have risen 58 percent, while the benchmark CRB commodities index has gained nearly 30 percent.

Developed and emerging stock indexes are both up around 20 percent since that speech but they are coming off their April highs. On the year both of them are largely flat.

"My best guess is that there will be a few weeks of positive reaction, followed by a sell-off, as investors realize the circular and pointless logic of (the argument that) QE2 could lead to permanent increases in economic activities," Jen said.

UNINTENDED CONSEQUENCES

Some advocates say quantitative easing works best by revaluing financial assets so that there will be a positive wealth effect for U.S. consumers, encouraging them to start spending again. The Fed argues that it boosts credit in a similar way to an orthodox easing by directly lowering long-term benchmark borrowing costs.

But the effect of ample dollar liquidity spreads beyond the United States, largely because emerging economies either are pegged to the dollar or have inflexible exchange rate policies. Even economies that do allow their currencies to appreciate are at risk of asset bubbles as cheap money seeks higher yields.

This means these fast-growing emerging economies effectively import the Fed's monetary easing and lift their demand for oil and commodities, whose prices also tend to rise on a weaker dollar.

The other problem is that easy money chasing high-yielding assets drives hot money into the emerging world, fans inflation and triggers monetary tightening which in turn slows growth -- creating a vicious circle.

"If QE3 is simply a repeat of QE2, I don't think it has a positive impact that has sustainability," said Bob Janjuah, head of tactical asset allocation at Nomura.

"(It) will make a commodity problem even worse. It won't help the economy but create a much bigger inflationary pressure.

QE3 will force one globally positive growth area, emerging markets, to slow down because of inflation ... We could end up with a negative effect."

Janjuah's preconditions for QE3 are a rise in the U.S. unemployment rate above 10 percent and a 20-25 percent fall in the S&P 500 index.

As benefits wane, many fear the cost of repeated QE operations could be self-defeating in that more money printing fuels inflation, debases the currency and ultimately raises the government's borrowing costs.

According to Jen, the Fed's balance sheet has grown by 10 points to 18 percent of GDP in two years - a similar scale to Japan's in the five years to 2006.

"The marginal impact of QE is decreasing progressively... The weight of debt on Fed balance sheet is increasing indeed," said Didier Saint-Georges, member of the investment committee at private asset manager Carmignac Gestion in Paris.

(Editing by Ruth Pitchford)

Source : http://www.reuters.com

Read More

Obama seeks "Plan B" as debt plans stall

WASHINGTON - A Republican plan to cut the U.S. deficit faced delay and stiff opposition on Wednesday, piling anxiety onto investors and ordinary Americans hoping for a late compromise to avoid a crippling debt default.

Deeply divided Republican and Democratic leaders are scrambling to find common ground with less than a week before the government hits its borrowing limit approved by Congress, triggering a possible default that would roil global markets.

Even if that fate is avoided, a plan that flinches from hefty deficit cuts could result in a downgrade of America's top-notch credit rating that would raise its borrowing costs and deal a severe blow to its anemic economic recovery.

After weeks of acrimonious debate, the contours of a possible deal have emerged but Republicans and Democrats are digging their heels in on some key demands and blaming each other for putting politics ahead of the national interest.

The chances of a quick resolution narrowed after a vote on a deficit plan by the top Republican in Congress was pushed back to Thursday from Wednesday.

Republican Speaker John Boehner rushed to rework his bill after an analysis found it would cut spending by $350 billion less than the $1.2 trillion over 10 years he had claimed.

President Barack Obama has threatened to veto the Boehner plan and top Senate Democrat Harry Reid described it as "dead on arrival."

The plan has also failed to win the backing of conservative Tea Party Republicans, who have steadfastly refused to back tax rises and want much heavier cuts to social programs that are traditionally protected by Obama's Democrats.

The White House said on Tuesday it was working with Congress to craft an unspecified "Plan B," providing a glimmer of hope that an 11th-hour deal could be reached as lawmakers feel the pressure from increasingly anxious financial markets.

The gridlock dragged down U.S. stocks for a second day on Tuesday and the dollar continued to slide in early Asian trade on Wednesday, falling to a fresh four-month low against the Japanese yen.

There have been no signs yet of the panic that could be sparked by a default, with most investors confident that a deal will somehow be struck.

A Reuters/Ipsos poll showed Americans are overwhelmingly concerned about the crisis and a majority -- 56 percent -- support a mixture of tax increases and spending cuts that Obama has advocated and Republicans have dismissed.

"WRAPPED UP IN A BOW"

Despite their differences -- sharpened by the looming presidential and congressional elections in November 2012 -- there is common ground between Boehner's bill and a rival plan by Reid that calls for a $2.7 trillion deficit reduction over the next decade.

Reid said he could not understand why Republicans did not support the plan he presented since it does not raise taxes and the spending cuts in the proposal have been endorsed by them.

"It's everything Republicans have demanded wrapped up in a bow and delivered to their door," he said.

Obama has said he cannot accept Boehner's two-step deficit plan because it extends the Treasury's borrowing authority only until early next year, risking a rerun of the debt impasse during the election campaign.

Obama, who will run for a second term, has backed Reid's one-step plan, which has a hike to the $14.3 trillion debt limit that would carry through the elections.

Neither plan goes far enough with deficit cuts to guarantee the U.S. sovereign credit rating will not be downgraded, an action that would dent the global safe-haven status of the dollar and Treasury bonds.

All three big credit-rating agencies have warned the United States needs to come up with a credible deficit plan to keep its top rating in the long term.

Executives from Standard and Poor's and Moody's Investors Service are due to appear before a congressional panel on Wednesday, where they will face scrutiny over their views on the debt ceiling debate.

Obama and Treasury Secretary Timothy Geithner have stressed the government will run out of room to borrow funds on August 2, next Tuesday.

But Treasury officials have never said when the government will exhaust its funds to pay the nation's bills and the consensus among Wall Street analysts is that the cash will not run out until about two weeks later than that.

(Writing by Stuart Grudgings; Editing by John O'Callaghan)

Source : http://www.reuters.com

Read More