Obama says Republicans must end 'threats' on fiscal impasse


* Obama says extortion cannot be routine part of democracy

* Boehner says "disappointed" by Obama

* Boehner earlier struck slightly more conciliatory tone

* Rising tide of warnings on consequences of debt default

* Investors fret, S&P 500 closes down 1.2 pct

By Roberta Rampton and Tim Reid

WASHINGTON, Oct 8 (Reuters) - President Barack Obama refusedto give ground in a fiscal confrontation with Republicans onTuesday, saying he would negotiate on budget issues only if theyagree to re-open the federal government and raise the debt limitwith no conditions.

At a news conference, an unbending Obama said he would nothold talks on ways to end the fiscal impasse while under threatfrom conservative Republicans, but agreed to discuss anything,including his healthcare plan, if they restore governmentfunding and raise the debt limit.

"If reasonable Republicans want to talk about these thingsagain, I'm ready to head up to the Hill and try," Obama toldreporters.

"But I'm not gonna do it until the more extreme parts of theRepublican Party stop forcing (House Speaker) John Boehner toissue threats about our economy. We can't make extortion routineas part of our democracy."

Obama's comments followed an earlier phone call to Boehner,who had adopted a slightly more conciliatory tone in comments toreporters after a meeting with House of Representatives'Republicans.

Boehner had said there were "no boundaries" in potentialtalks, and made no mention of recent Republican demands to delayparts of Obama's healthcare law in return for approving funds toend the government shutdown.

But speaking to reporters after Obama's news conference,Boehner said he was "disappointed" by the president's approach.

"What the president said today was 'if there isunconditional surrender by Republicans, he'll sit down and talkto us.' That's not the way our government works," Boehner said.

The public give-and-take between Obama and Boehner was themost direct exchange between the two leaders since a White Housemeeting last week, but neither side has come up with a path toresolving the bitter fiscal stalemate.

The spending and budget impasse has shut down the federalgovernment for eight days and threatens to prevent the raisingof the country's $16.7 trillion borrowing limit before an Oct.17 deadline identified by Treasury Secretary Jack Lew.

Investors are exhibiting increasing anxiety as the deadlinefor raising the debt ceiling approaches.

Interest rates on one-month U.S. government debt hit a5-year peak on Tuesday and the Standard & Poor's 500 stock index closed down 1.23 percent.

"Until you see some progress, things will likely get worse,"said Eric Green, global head of rates, currency and commodityresearch and strategy at TD Securities in New York.

On Tuesday, House Republicans proposed the creation of abipartisan committee to work on the issue, which was rejected byDemocrats. Senate Democrats also introduced a bill to raise thedebt ceiling with no conditions through 2014, but included noneof the deficit reductions that Republicans have demanded.

House Republicans emerged from a morning meeting saying theywould insist on deficit-reduction talks with Obama as acondition for raising the federal debt limit, but some signaledthey might pass short-term legislation to avert a default inexchange for immediate talks.

"If we have a negotiation and a framework set up, we canprobably reach a way to raise the debt ceiling while thenegotiation is in progress. But nobody is going to raise itbefore there is a negotiation," Republican Representative TomCole of Oklahoma said.


The impasse sparked a rising tide of warnings about thepotential global economic chaos of a U.S. default, with foreigncreditors and the International Monetary Fund's chief economistwarning of the potential consequences.

"I think what could be said is if there was a problemlifting the debt ceiling, it could well be that what is now arecovery would turn into a recession or even worse," IMF chiefeconomist Olivier Blanchard said.

Japan's finance minister said a failure by the United Statesto quickly resolve its political deadlock over governmentfinances could damage the global economy.

"The U.S. must avoid a situation where it cannot pay (forits debt) and its triple-A ranking plunges all of a sudden,"Japanese Finance Minister Taro Aso told reporters after acabinet meeting.

"The U.S. must be fully aware that if that happens, the U.S.would fall into fiscal crisis," he said in the latest sign thatJapan and China, the biggest foreign creditors to the UnitedStates, are worried the impasse could harm their trillions ofdollars of investments in U.S. Treasury bonds.

Obama said he did not think the crisis would create lastinginternational damage, saying "folks around the world willattribute this to the usual messy process of Americandemocracy."

The U.S. Chamber of Commerce, a traditional supporter ofpro-business Republicans, also warned about further delays inreopening the federal government and raising the debt limit.

"The debt ceiling specifically must pass on a timely basisto avoid inflicting substantial and enduring damage on the U.S.economy," said Bruce Josten, the group's executive vicepresident.

Polls show growing public concern over the impasse, withRepublicans getting slightly more of the blame.

A Reuters/Ipsos poll on Tuesday found the percentage ofAmericans concerned about the shutdown rose to 75 percent from66 percent last week. Blame for Republicans grew to 30 percentfrom 26 percent, with the level of blame for Obama and Democratsat 19 percent, up from 18 percent.

Plenty of obstacles remain to settling the issue. In theSenate, Democrats introduced a bill on Tuesday to raise thegovernment's borrowing authority by enough to last through 2014.

A Democratic aide said they were hopeful they could get the60 votes needed to overcome procedural hurdles in the 100-memberSenate and pass the debt ceiling bill with no strings attached,even though the measure includes no deficit reduction.

But Republican Senator John McCain, who some Democrats hadhoped might support getting the "clean" debt ceiling bill to avote, declined to back it when asked by reporters. "The answerto this is negotiations," said McCain from Arizona.

In the House, Republican leaders unveiled a proposal for a20-member committee to make recommendations on a debt limitincrease and look at ways to rein in the country's deficits, butDemocrats quickly rejected the idea.

Under the legislation, the Republican House would name 10members to the panel while the Democratic-led Senate would namethe other 10. The panel would also make recommendations on ameasure to fund the government for the 2014 fiscal year, endingthe shutdown.

The plan is reminiscent of a failed 2011 "supercommittee" ofRepublicans and Democrats from the House and Senate that wasasked to find trillions of new budget savings.

The White House said Obama would veto a bill for the newdeficit-reduction panel if it reached his desk as it did nothingto solve the immediate obligation for Congress to open thegovernment and pay its bills.

The special committee measure passed the House in a 224-197vote on Tuesday evening with the support of just two Democratsand opposed by five Republicans. It seemed unlikely to be takenup in the Senate.

Despite widespread warnings about failing to raise the debtlimit, some House Republicans dismissed the prospect of afirst-ever default.

"There's no way to default. There is enough money cominginto the Treasury to pay interest and roll over principal," saidRepresentative Justin Amash of Michigan, a favorite of thesmaller-government Tea Party wing of the Republican Party.

Asked about warnings of catastrophic consequences if thedebt limit is not increased, Amash told reporters: "I say it'spatently not true what they are saying."

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