Obama, lawmakers press ahead for elusive debt deal (Reuters)

WASHINGTON (Reuters) – President Barack Obama and congressional leaders pressed ahead with private talks on deficit reduction on Saturday, seeking an as-yet elusive way to lift the debt ceiling and avoid a U.S. default next month.

Congress must raise the $14.3 trillion limit on U.S. borrowing by August 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 raise 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.

But prospects for a deal anytime soon appear unlikely, as the House and Senate were expected to spend much of next week debating budget-related measures that have little chance of becoming law.

On Thursday evening Obama gave lawmakers a Saturday deadline to come up with a plan to go forward and suggested he could call for further talks over the weekend if needed.

No new talks were scheduled, however, according to Republican and Democratic aides.

A White House official said Obama, Vice President Joe Biden, and other administration officials were "in frequent communication" with congressional leaders and staff, discussing "various options."

The top two Republicans in the House of Representatives, John Boehner and Eric Cantor, met on Friday with Treasury Secretary Timothy Geithner and Bill Daley, the White House chief of staff.

Obama pressed his case with the American public in his weekly radio and Internet address on Saturday.

"The truth is, you can't solve our deficit without cutting spending," he said.

"But you also can't solve it without asking the wealthiest Americans to pay their fair share -- or without taking on loopholes that give special interests and big corporations tax breaks that middle-class Americans don't get."

Republicans say the tax hikes Obama is seeking would hurt small businesses.

BALANCED BUDGET?

The House is expected next Tuesday to pass a bill that would raise the debt ceiling by the $2.4 trillion Obama has requested as long as Congress adopted a balanced budget amendment -- an unlikely prospect.

Republican Senator Orrin Hatch has lined up every Senate Republican behind a balanced-budget measure. It is expected to fail in the Democratic-controlled chamber next week.

"Only by restoring constitutional restraints on the ability of Congress to spend, can we constrain the growth of the federal government," he said in the weekly Republican address.

"The solution to a spending crisis is not tax increases. Yet, Washington has consistently demonstrated that it cannot control its urge to spend."

As the two sides bicker, the consequences of inaction are looming. Ratings agencies Moody's and Standard & Poor's have signaled they may cut the gold-plated U.S. credit rating if the borrowing limit is not raised and deficit-reduction measures are not laid out.

The White House and congressional leaders have tried to reassure markets that the United States would not default on its debt.

A backup plan put forward by Senate Republican Leader Mitch McConnell may be the solution all sides 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.

"The idea itself is stupid," Republican Representative Jason Chaffetz told Fox News. "The people that have been there, the so-called adults in the room, have been there too long. And that's why we're in this problem."

The president warned on Friday that inaction could lead to higher borrowing costs for ordinary Americans -- "effectively a tax increase on everybody," he said.

"Whether you're using your credit or you're trying to get a loan for a car or a student loan, businesses that are trying to make payroll, all of them could end up being impacted as a consequence of a default," Obama said.

(Additional reporting by Laura MacInnis and Mari Saito; Editing by Eric Beech)

Obama, lawmakers debate taxes in latest deficit talk (Reuters)

WASHINGTON (Reuters) – President Barack Obama and top Republicans faced off over taxes and healthcare spending on Thursday as China added its voice to growing pressure on Washington to reach a deal to raise the debt limit.

After days of talks that participants described as both productive and acrimonious, the two sides are still trying to forge a deal that would cut the deficit and allow Congress to raise the $14.3 trillion borrowing limit before August 2, when the country would face default.

China, the United States' biggest foreign creditor with more than $1 trillion in Treasury debt, added to the pressure, urging Washington to adopt responsible policies to protect investor interests.

Markets reacted skittishly as an agreement remained elusive, and divisions within the Republican Party seemed to increase the difficulty of striking a deal.

The latest round of talks lasted a little over an hour, beginning at 4:24 p.m. EDT and ending at 5:43 p.m., according to the White House.

Thursday's session followed a difficult meeting the previous day, when the Democratic president clashed with Republican lawmakers and declared "Enough's enough." A leading Republican said Obama walked out of the meeting.

The two sides are at an impasse over whether some tax hikes should be a part of a deal to reduce the deficit.

"The eyes of the country are on us, the eyes of the world are on us," Treasury Secretary Timothy Geithner told reporters after meeting with Democratic senators. "We are running out of time."

Beijing's comments followed a warning by Moody's Investors Service that it might strip the gold-plated U.S. credit rating if the $14.3 trillion debt limit is not raised.

Standard & Poor's has also privately told U.S. lawmakers and business groups that it might cut the rating if the government fails to make any of its expected payments, including Social Security retirement checks, even if it makes all of its debt payments, a source in the meeting said.

BUSINESS WEIGHS IN

The U.S. Treasury has warned that it will run out of money after August 2 to pay all of the country's bills if a deal is not reached to raise the debt ceiling, which caps the amount of money the United States can borrow.

The prospect of a cut in the United States' AAA credit rating hit stocks prices globally and weakened the dollar Thursday. Bond prices fell in New York and yields rose, in part due to the Moody's warning.

Business leaders have added their powerful voice, calling on Congress to put aside politics and reach an agreement to allow the debt ceiling to be raised.

"It is an imperative that the debt ceiling be fixed and it's an imperative that the United States shows fiscal discipline," said JPMorgan Chase chief executive Jamie Dimon.

"No one, no one can tell me with certainty that a default wouldn't cause catastrophe and therefore it's irresponsible to take that chance," he told reporters.

Failure to raise the debt ceiling could spook investors, causing interest rates to surge, stock prices to plummet, push the United States back into recession and cause turmoil on global markets,

Republicans demand $2.4 trillion in spending cuts in return for covering debt needs through 2012 elections. Democrats want tax increases for the wealthy in any deal.

The two sides appear to be moving farther apart. Republicans charge that many of the spending cuts that the White House has offered are "smoke and mirrors."

The two sides agree on less than $1.4 trillion in spending cuts, the No. 2 Republican in the House of Representatives, Republican Eric Cantor, said on Wednesday, down from roughly $2 trillion a week ago.

Federal Reserve Chairman Ben Bernanke said the spiraling fallout of a potential default -- higher interest rates and thus a bigger deficit -- would be a "self-inflicted wound."

In testimony on Capitol Hill, the U.S. central bank chief also inserted a word of caution that overzealous spending cuts in the very short term could derail the fragile economy.

(Additional reporting by Donna Smith, Rachelle Younglai, Doug Palmer and Caren Bohan in Washington, and Ben Blanchard and Sabrina Mao in Beijing; Writing by Deborah Charles and Jeff Mason; Editing by Eric Beech and Christopher Wilson)

Greek lawmakers endorse austerity despite violence (Reuters)

ATHENS (Reuters) – Greece's parliament approved deeply unpopular austerity measures despite worsening street violence on Wednesday, in a vote vital to secure international aid and prevent the euro zone's first sovereign debt default.

Lawmakers passed a five-year package of spending cuts, tax rises and state asset sales by a comfortable margin of 155 votes to 138 in a roll-call vote, handing a victory to embattled Prime Minister George Papandreou.

"We must avoid the country's collapse at all costs. Now is not the time to step back," the Socialist premier told lawmakers just before the vote.

The solid margin suggested the government should be able to push through laws implementing specific budget measures and asset sales on Thursday, clearing the last obstacle to obtaining 12 billion euros ($17.3 billion) of emergency loans.

But with the country on the brink of bankruptcy and social unrest mounting, it is unclear whether the government can stick to the tight schedule imposed by the European Union and the International Monetary Fund to implement the austerity steps, even if it wins all this week's parliamentary votes.

The full pain of pay and benefit cuts and sharp tax increases has yet to be felt, and public anger is boiling.

Outside parliament, there were clashes between stone-throwing masked youths and riot police, who fired clouds of teargas from behind steel crash barriers to keep rioters at bay.

One group of anarchists armed with staves and iron bars attacked finance ministry offices just off Syntagma Square, smashing windows at the entrance and on higher floors. A post office on the ground floor of the ministry building was set on fire, sending acrid grey smoke billowing into the sky.

In cat-and-mouse clashes with police, rioters erected makeshift barricades with benches, chairs and garbage bins on the fringes of the square, where thousands of peaceful protesters demonstrated against the austerity plan.

Chancellor Angela Merkel of Germany, Europe's reluctant paymaster and the main contributor to the bailout of Greece, was quick to praise the "brave" vote. But Finance Minister Wolfgang Schaeuble stressed the importance of "implementing these (measures) with resolve in the coming weeks, months and years."

The presidents of the European Council and the European Commission, Herman van Rompuy and Jose Manuel Barroso, said in a joint statement that Greece had taken "a vital step back -- from the very grave scenario of default."

However, many economists and investors still expect Greece to default in the medium term because its 340 billion euro pile of sovereign debt is so huge, about 150 percent of the country's annual economic output. A senior German ruling coalition politician, Free Democratic floor leader Rainer Bruederle, said on Wednesday that a debt restructuring was inevitable.

Expectations for a positive vote and progress in talks between banks and euro zone governments on a rollover of privately held Greek debt lifted the euro and global stocks on Wednesday. Prices of bonds issued by the zone's weaker states rose.

But markets then fell back slightly after news of parliament's decision.

"This is logical and may continue over the next couple of hours and days as markets will quickly realize that this is only a first step on the road to recovery," said Philippe Gijsels, head of research at BNP Paribas Fortis Global Markets.

"We still expect a hot, nervous and volatile summer."

ROLLOVER

Despite a threat by trade unions staging a 48-hour general strike to prevent lawmakers entering the colonnaded parliament building, deputies were able to reach the chamber. Strikes and sporadic violence have not blown the government off course so far, but its approval rating has plunged in recent months.

Only one deputy in the ruling PASOK party voted against the plan and was immediately expelled from the party by Papandreou. At least one opposition deputy broke ranks with the main conservative New Democracy party and voted "yes."

PASOK now holds 154 seats in the 300-member chamber and it was helped on Wednesday by the abstention of a small center-right splinter group of five deputies led by former foreign minister Dora Bakoyanis.

The EU and the IMF have insisted Greece must adopt the austerity plan, which seeks to save the government 28 billion euros, in order to receive its next slice of aid. Without the money, Athens would run out of cash within weeks.

In May last year Greece signed a 110 billion euro bailout deal with the EU and the IMF, which later jumped in to keep Ireland and Portugal afloat as the euro zone reeled from high government debt in the wake of the global financial crisis.

If Greece's fiscal legislation passes on Thursday, euro zone finance ministers meeting in Brussels on Sunday are expected to agree to release their part of the next aid tranche, with the IMF following on July 5.

Attention will then switch to putting together a second and longer-term rescue package for Greece of about the same magnitude as the initial 110 billion euro bailout.

The new program would involve some 30 billion euros in private-sector participation via a "voluntary" rollover of maturing debt, a similar sum from Greek privatization revenues, and an expected 55 billion euros in new official funding.

Banking sources said politicians and commercial bankers were confident that credit rating agencies would accept a French proposal for a voluntary private sector rollover of Greek debt without triggering a default or a payout of credit insurance.

The agencies have made no public comment on the plan, details of which are still under negotiation.

Euro zone banks and insurers are considering a scheme under which private bondholders would reinvest half of the proceeds of maturing Greek debt in new 30-year bonds paying 5.5 percent interest plus a bonus linked to Greece's economic growth rate.

Of the other half, 30 percent would be paid back to investors in cash and 20 percent invested in a "guarantee fund" of zero-coupon AAA securities with deferred interest that might be issued by the euro zone's bailout fund, officials and banking sources said.

In addition to the rating agencies, the rollover scheme will need the approval of the European Central Bank, and ECB policymaker Juergen Stark rejected on Wednesday any scheme that involved EU guarantees of bonds, saying it would breach European treaty rules.

Asked about a scenario in which banks would exchange their Greek bonds for new paper guaranteed by EU states -- an approach similar to the "Brady bonds" used in Latin America in 1989 -- he said: "This instrument is disqualified.

French banks had the largest exposure to the Greek economy, both the public and private sectors, at the end of 2010 with over $56 billion, data from the Bank for International Settlements shows. The next most exposed country is Germany.

(Additional reporting by George Georgiopoulos, Daniel Flynn and James Mackenzie in Athens, Philipp Halstrick and Ed Taylor in Frankfurt, Stephen Brown in Berlin, and Atul Prakash and Jeremy Gaunt in London; writing by Paul Taylor; editing by Janet McBride and Andrew Torchia)