U.S. fiscal negotiations sputter as deadline nears


* Debt ceiling increase needed by Thursday

* Talks seen continuing into early next week

* Road to a deal looks difficult

By Thomas Ferraro and Tim Reid

WASHINGTON, Oct 12 (Reuters) - Congressional negotiations toend a U.S. fiscal crisis gripping Washington and spookingfinancial markets hung by a thread on Saturday after bipartisantalks broke down in the House of Representatives and shifted toSenate leaders.

Senate Majority Leader Harry Reid, a Democrat, held aninitial session with Senate Republican leader Mitch McConnell.But uncertainty remained about their ability to reach anagreement quickly to end a partial government shutdown andincrease the nation's borrowing authority.

Thursday is the deadline for raising the debt ceiling,necessary to avoid a possible government default. The Senate wasset to meet on Sunday, but the U.S. House of Representatives wasnot, so Congress will be cutting it close.

"Economists say it won't be long before financial marketsreact negatively to this continued uncertainty," Reid said onthe Senate floor.

"The life savings of ordinary Americans are at risk."

Among the unresolved issues is the duration of the debtceiling increase. House Republicans were pushing a boost thatwould last only six weeks, producing another potential showdownin the middle of the holiday season. Democrats want to push thenext debt ceiling deadline at least well into the new year.

Also at issue were government spending levels and Republicanconcerns about President Barack Obama's signature healthcarelaw, popularly known as Obamacare. Republican demands fordefunding Obamacare led to the shutdown on Oct. 1.

Reid and other Senate Democratic leaders went to the WhiteHouse to confer with Obama in the afternoon, but said nothing toreporters as they left after an hour and 15 minutes.

At the meeting, Obama and Senate Democratic leaders agreedthat talks should continue between Reid and McConnell, a seniorparty aide said.

"But Democrats' position remained the same: Democrats arewilling to negotiate on anything Republicans want to discuss assoon as we reopen the government and pay our bills," the aideadded.

Lawmakers are also scrambling to put hundreds of thousandsof federal employees back to work after their failure to fundthe government resulted in the partial shutdown.

Dick Durbin, the second-ranking Democrat in the Senate, said the goal was to reach a bipartisan deal in the Senatebefore financial markets reopen on Monday.

But the road to a deal appeared difficult, as Reid dismissedRepublican Senator Susan Collins' plan to extend the U.S. debtlimit until Jan. 31 and fund the government for six more months.

That plan had given some moderate lawmakers hopes for aquick compromise, but Democrats said it was saddled with toomany objectionable add-ons.

Collins expressed disappointment, but said she remainedhopeful "that a bipartisan solution to reopen the government andprevent a default is within our reach."

The "preliminary" Reid-McConnell negotiations - at 9 a.m. onSaturday in Reid's office - were launched one day after Obamarejected a proposal by House Republicans for a short-termincrease in the debt limit to Nov. 22.

Democrats warned that such a small increase in borrowingauthority would simply lead to another round of bitterconfrontations in Congress and could choke off consumerconfidence just as the Christmas buying season was starting.

The flurry of action in the Senate came as House SpeakerJohn Boehner informed his fellow Republicans in a privatemeeting that the White House had rejected its proposals and there likely would be no more ideas delivered to Obama now thatattention was shifting to Senate negotiations.


Although McConnell initiated talks with Reid, the Republicanhas maintained a relatively low profile as he faces a toughre-election campaign back home in Kentucky.

"We had a good meeting" was all McConnell would say toquestions shouted by reporters in a Senate hallway.

While some senators were hopeful now that Reid and McConnellwere negotiating, no clear path to a deal was evident.

"Senator Reid and Senator McConnell are talking to eachother for the first time and that's good," Republican SenatorRoy Blunt said.

Even if senators craft a proposal to end the governmentshutdown and raise the debt ceiling, at least some Republicansupport will be needed to pass it in the House. That support isfar from guaranteed, especially if the Senate deal does notinclude any new attacks on the healthcare law.

As Senate leaders tried to craft a deal, many House membersheaded to their home districts, having been informed there wouldbe no votes before Monday evening.

With every passing day, according to opinion polls,Americans' patience has worn thin with Republican tactics thatled to the government shutdown, enhancing prospects of a deal.

"Markets rose on hope for a deal, so markets are likely tofall as reality check alters sentiment," said David Kotok,co-founder and chief investment officer at Cumberland Advisors.Kotok said he believed there would be no deal before Thursday,adding, "This fight is a long way from over."

Companies and trade associations have been stepping up theirefforts on Capitol Hill as the debt ceiling deadline approaches.

"I was optimistic yesterday morning," David French, thechief lobbyist for the National Retail Federation, told Reuterson Saturday. "I'm a little less optimistic today and so arefolks I've talked to" on Capitol Hill.

Retailers are particularly concerned about going into aholiday season with debt ceiling jitters hanging over theeconomy.

Beyond that, French said: "They're concerned aboutWashington. They're concerned about the level of dysfunction.Our members do not like lurching from crisis to crisis withouthope of a resolution."

Scott DeFife, top lobbyist for the National RestaurantAssociation, said his industry was "extraordinarily concernedwith the debt limit."

For his members, he said: "Consumer confidence is critical.Any financial issue like this can really put a damper onactivity."

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