Republican US debt plan heads to vote

European stocks fell for the fourth straight session, following their Asian counterparts, as an Aug. 2 deadline for raising the US borrowing limit approached without a bi-partisan deficit reduction agreement in place in the sharply divided Congress.

A vote of approval on Thursday in the House of Representatives for a deficit-cutting plan presented by the top Republican in Congress, John Boehner, could help ease the tense debt deadlock that is increasingly spooking global markets.

The House tentatively scheduled the vote between 5:45-6:15 p.m. EDT (2145-2215 GMT), a congressional aide said.

Passage of the Boehner bill could pave the way for a for bi-partisan compromise to avert the threat of default.

Hours before the expected House vote, several Republican rebels backed by the fiscally conservative Tea Party movement were still saying that they would vote against Boehner's plan.

Its defeat would swing the momentum toward a rival Democratic plan in the Senate but leave no clear way to a compromise deal to allow the raising of the $14.3 trillion US government debt ceiling.

A failure to raise the limit by Aug. 2 could trigger a crippling default that would shake the global financial system and tip the United States back into recession.

While most analysts hope a default will be avoided by an eleventh hour deal, the risk remains for a damaging downgrade of the United States' top-notch credit rating, a move which would raise US borrowing costs and alarm investors globally.

Boehner called the vote a "big test" and acknowledged the opposition of "hard-line conservatives" in his own party, but said he was hopeful of an eventual deal. "It is what do-able and I think we can get there," he told NBC Nightly News on Wednesday.

Explaining his opposition to the Boehner plan, Republican Representative Phil Gingrey told CNN that "We will never get a balanced budget amendment unless we take advantage of this chokepoint I'm going to stand strong on this. I'm going to vote no."

Boehner's bill needs 217 votes and its chances appear too close to call even after he bluntly told fellow Republicans to "get your ass in line" behind his plan.

Reflecting nervousness in the business community, chief executives from the largest US financial firms sent a letter to President Barack Obama and members of Congress urging them to reach a compromise to avert default.

"The consequences of inaction for our economy, the already struggling job market, the financial circumstances of American businesses and families, and for America's global economic leadership -- would be very grave," they said.

Despite the falls in Europe and Asia, US stock indexes rose on Thursday after weekly claims for unemployment benefits fell below a key level for the first time since early April, but the session was predicted to be volatile ahead of the key House vote later in the day.

Obama, a Democrat who is seeking re-election in 2012 and wants to avoid the debt crisis spilling over into the campaigning, has threatened to veto the two-step Boehner bill that requires another decision on the debt ceiling next year.

A majority of the Democratic-controlled Senate has vowed to vote against the Boehner plan.

But if the House approves it this would give the bill legitimacy and make it a crucial element of the risky legislative chess game that seems likely to play out to forge a compromise deal by Aug. 2. That is when the Obama administration says it will be unable to borrow more money to pay all of its bills.

Obama has warned of financial "Armageddon" if a compromise deal is not reached by the deadline, but the White House rejects the idea that he could invoke an obscure constitutional clause to raise the debt limit.

Several House Democrats planned to hold a news conference on Thursday to urge Obama to take that option if necessary.

After weeks of bickering and setbacks, some common ground has emerged between rival Republican and Democrat plans to cut the deficit and raise the debt limit.

A bill being pushed by top Senate Democrat Harry Reid and backed by the White House would cut $2.2 trillion from the deficit over 10 years without raising taxes.

Reid has said Boehner's plan would be "dead on arrival" but that he could incorporate elements of it in a way that could win support from both parties.

But a spokesman for Senate Republican leader Mitch McConnell denied that any talks were under way with Democrats on a compromise. "He is not working on a new bill. He supports the Speaker's (Boehner) bill," said aide Don Stewart.

Obama is facing a major test of his leadership over the debt crisis as he seeks to remove the debt-ceiling issue as a threat to the weak economy ahead of the 2012 election.

Investors have raised their holdings of safe-haven assets such as gold but have reacted relatively calmly to the prospect of an unprecedented US default and a damaging credit downgrade, holding out hope that a late deal will be struck.

The gridlock in Washington has also raised concern over the long-term decline of US economic power and the status of the dollar as the world's reserve currency.

"The US is experiencing an 'end of empire' moment and the dollar share of global reserves is likely to fall gradually," said Jim Leaviss, head of retail fixed income at M&G Investments in London.

Copyright Reuters, 2011