U.S. government shutdown starts; Congress deadlock remains

Reuters

* Republican distaste for Obamacare at heart of battle

* No clear path to break Congressional deadlock

* Debt ceiling deadline in mid-October

* U.S. dollar slips; U.S. stock futures up

By John Whitesides

WASHINGTON, Oct 1 (Reuters) - The U.S. government began apartial shutdown on Tuesday for the first time in 17 years,potentially putting up to 1 million workers on unpaid leave,closing national parks and stalling medical research projects.

Federal agencies were directed to cut back services afterlawmakers could not break a political stalemate that sparked newquestions about the ability of a deeply divided Congress toperform its most basic functions.

After House Republicans floated a late offer to break thelogjam, Senate Majority Leader Harry Reid rejected the idea,saying Democrats would not enter into formal negotiations onspending "with a gun to our head" in the form of governmentshutdowns.

In the hours leading up to the deadline, theDemocratic-controlled Senate repeatedly stripped measures passedby the House that tied temporary funding for governmentoperations to delaying or scaling back the Affordable Care Acthealthcare overhaul known as Obamacare.

Shortly after midnight, President Barack Obama tweeted: "TheAffordable Care Act is moving forward. You can't shut it down."

Whether the shutdown represents another bump in the road fora Congress increasingly plagued by dysfunction or is a sign of amore alarming breakdown in the political process could bedetermined by the reaction among voters and on Wall Street.

The U.S. dollar slipped 0.2 percent against a basketof widely traded currencies. The price of the 10-year U.S.Treasury note, a bedrock reference for bond markets,fell 0.3 percent.

S&P stock futures rose 0.5 percent, pointing toward ahigher Wall Street open. On Monday, the S&P 500 index closed 0.6percent lower, weighed down by defense contractors since theshutdown would likely diminish its new business.

The political dysfunction at the Capitol also raised freshconcerns about whether Congress can meet a crucial mid-Octoberdeadline to raise the government's $16.7 trillion debt ceiling.

"A technical Treasury default could follow, sendingfinancial markets into a tailspin," wrote ING analyst TomLevinson.

After missing the midnight (0400 GMT) deadline to avert theshutdown, Republicans and Democrats in the House continued abitter blame game, each side shifting responsibility to theother in efforts to redirect a possible public backlash.

If Congress can agree to a new funding bill soon, theshutdown would last days rather than weeks. But no signs emergedof a strategy to bring the parties together.

With an eye on the 2014 congressional elections, bothparties tried to deflect responsibility for the shutdown.President Barack Obama accused Republicans of being too beholdento Tea Party conservatives in the House of Representatives andsaid the shutdown might threaten the economic recovery.

The political stakes are particularly high for Republicans,who are trying to regain control of the Senate next year. Pollsshow they are more likely to be blamed for the shutdown, as theywere during the last one in 1996.

"Somebody is going to win, and somebody is going to lose,"said pollster Peter Brown of the Quinnipiac University poll."Going in, Obama and the Democrats have a little edge."

POLITICAL POLARIZATION

The shutdown, the culmination of three years of dividedgovernment and growing political polarization, was spearheadedby Tea Party conservatives united in their opposition to Obama,their distaste for the president's healthcare law and theircampaign pledges to rein in government spending.

Obama refused to negotiate over the demands and warned ashutdown could "throw a wrench into the gears of our economy."

Some government offices and national parks will beshuttered, but spending for essential functions related tonational security and public safety will continue, including payfor U.S. military troops.

"It's not shocking there is a shutdown, the shock is that ithasn't happened before this," said Republican strategist JohnFeehery, a former Capitol Hill aide. "We have a dividedgovernment with such diametrically opposed views, we need acrisis to get any kind of results."

"The key to this is not what happens in Washington," saidDemocratic strategist Chris Kofinis. "The key is what happensout in the real world. When Joe Public starts rebelling and thefinancial markets start melting down, then we'll see what theseguys do."

A Reuters/Ipsos poll showed about one-quarter of Americanswould blame Republicans for a shutdown, 14 percent would blameObama and 5 percent would blame Democrats in Congress, while 44percent said everyone would be to blame.

An anticipated revolt by moderate House Republicans fizzledearlier on Monday after House Speaker John Boehner made personalappeals to many of them to back him on a key procedural vote,said Republican Representative Peter King of New York.

After Boehner made his appeal, House Democratic Whip StenyHoyer called on him to permit a vote on a simple extension offederal funding of the government without any Obamacare add-on."I dare you to do that," Hoyer roared.

THE FALLOUT

The potential fallout has some Republican Party leadersworried ahead of the 2014 mid-term elections and the 2016presidential race, particularly given the Republican divisionsover the shutdown.

Republican Senator Ted Cruz of Texas, who commandeered theSenate floor for 21 hours last week to stoke the confrontationand urge House colleagues to join him, sparked a feud withfellow Republicans who disagreed with the shutdown and accusedthe potential 2016 presidential candidate of grandstanding.

"Whether or not we're responsible for it, we're going to getblamed for it," King told reporters on Monday. "They've lockedthemselves into a situation, a dead end that Ted Cruz created."

It was unclear how long the shutdown would last, and therewas no clear plan to break the impasse. The Senate on Tuesdayplanned to recess until 9:30 a.m. (1330 GMT), when Democratsexpect to formally reject the House of Representatives' latestoffer for funding the government.

The shutdown will continue until Congress resolves itsdifferences, which may be days or months. But the conflict couldspill over into the more crucial dispute over raising thefederal government's borrowing authority.

A failure to raise the $16.7 trillion debt ceiling wouldforce the country to default on its obligations, dealing apotentially painful blow to the economy and sending shockwavesaround global markets.

Some analysts said a brief government shutdown - and aresulting backlash against lawmakers - could cool Republicandemands for a showdown over the debt limit.

"A lot of this is political theater. It's not about realpolicy. Part of this is taking a stand for their constituents,"said Julian Zelizer, a historian at Princeton University.

"If there is fallout from a shutdown and there is a bigenough shock, maybe they will be willing to move on to otherissues," he said.

Obama says negotiating over the demands would only encouragefuture confrontations, and Democrats are wary of passing ashort-term funding bill that would push the confrontation tooclose to the deadline for raising the debt ceiling.

"The bottom line is very simple," Democratic Senator ChuckSchumer said. "You negotiate on this, they will up the ante forthe debt ceiling."

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