US mulls options on debt deal, time runs short

WASHINGTON: With time running short, President Barack Obama and lawmakers will mull ways to lift the US debt ceiling and reduce the deficit on Sunday as an Aug. 2 deadline to prevent a default draws dangerously close.

Obama, a Democrat, had said he wanted to hear from congressional leaders by the weekend about a way forward in the stalled debt talks, but the day passed without an announcement of a new White House meeting.

One could happen on Sunday.

Congress must raise the $14.3 trillion limit on US borrowing by Aug. 2 or the government will run out of money to pay its bills, causing turmoil in global financial markets and potentially forcing the United States into another recession.

Republicans want a deficit-cutting deal in order to support raising the debt limit, but they disagree with Democrats on how to do it. The White House wants some tax increases on wealthier Americans to be part of a package; Republicans reject that.

White House budget director Jack Lew will press the Obama administration's case in a series of appearances on network television shows on Sunday morning. Lew has been a key member of the Obama negotiating team.

Prospects for a deal appear slim. Officials said Obama, Vice President Joe Biden and other staff discussed "various options" with lawmakers and other staff on Saturday, but no significant progress was reported.

"AN EMBARRASSMENT"

State governors, fearing the effects of the debt talks on their own credit ratings, pressured Washington to get a deal.

"This is a dangerous and equally ridiculous situation that's playing itself out. It takes one sentence to solve this problem -- and that's to lift the debt ceiling," Connecticut Governor Dannel Malloy, a Democrat, told Reuters at a National Governors Association meeting in Salt Lake City.

"It would be an embarrassment for the United States of America to default on its obligations," said Virginia Governor Bob McDonnell, a Republican.

Experts say it would be much more than an embarrassment.

Ratings agencies Moody's and Standard & Poor's have signaled they may cut the gold-plated US credit rating if the borrowing limit is not raised and deficit-reduction measures are not laid out.

A backup plan put forward by Senate Republican Leader Mitch McConnell may be the solution all sides can embrace if a big deal cannot be reached.

McConnell's plan would essentially allow Democrats to raise the debt ceiling without Republican help, and Senate Democratic Leader Harry Reid has cautiously embraced it.

The plan could include about $1.5 trillion in spending cuts and set up a panel to find further savings. The Senate could vote on it late next week, but it remains unpopular with House Republicans.

Copyright Reuters, 2011