U.S. fiscal talks stumble as lawmakers race against time

Reuters

* Chaos in Congress as deadline nears on fiscal impasse

* Two plans by House Republicans collapse amid opposition

* Senate talks resume after waiting for House plan

* Fitch Ratings warns it could cut U.S. credit rating

By Richard Cowan and Thomas Ferraro

WASHINGTON, Oct 15 (Reuters) - Efforts by lawmakers to stopa U.S. debt default were in disarray on Tuesday with just over aday before the government's authority to borrow money lapses,risking the Treasury's ability to pay bills and creditors.

Chaotic negotiations to end the U.S. fiscal impasse failedto produce a deal, and left Congress and President Barack Obamadesperately searching for a way to reopen the government andraise the country's debt limit ahead of a Thursday deadline.

Both measures require approval by the U.S. Senate and theHouse of Representatives. In the Democrat-led Senate, leaders ofboth parties resumed negotiations, but the Republican majorityin the House appeared to be even more divided than usual.

In a span of a few hours, two plans floated by Republicansin the fractious House collapsed for a lack of support andSenate negotiations that were close to an agreement weresuspended to await a solution from the House.

But on Tuesday evening, spokesmen for Senate Majority LeaderHarry Reid and Senate Republican leader Mitch McConnell saidtheir talks were back on. A spokesman for Reid said the twoleaders "are optimistic that an agreement is within reach" butoffered no timetable.

The uncertainty led Fitch Ratings to warn it could cut thesovereign credit rating of the United States from AAA, citingthe political brinkmanship over raising the federal debtceiling.

Fitch's action emphasized how close to an economicallydamaging default Washington has come, and sent U.S. stockfutures lower.

House Republicans twice tried to come up with a newcompromise but failed to satisfy Obama, Senate Democrats or TeaParty conservatives who are determined to win changes to thepresident's signature healthcare law before they will agree toconcessions on the budget.

The first House Republican attempt was shot down in aclosed-door meeting that had begun with members singing the hymn"Amazing Grace."

The second plan was scuttled hours before it was expected tohit the House floor for a vote after the influential HeritageAction for America, a conservative group, urged a "no" votebecause it did not do enough to stop Obama's healthcare law.

Heritage said it would consider the plan a "key vote" inevaluating whether to back candidates in next year'scongressional elections. Shortly after that warning, a committeehearing scheduled to set rules for the debate was postponed andthe plan put in limbo.

This second plan from House Republicans dropped a provisionto delay a tax on medical devices that would be used to pay forObama's healthcare plan. Obama had objected to that proposal.

But the second plan, which would extend the federal debtlimit until Feb. 7 like the Senate, would only providegovernment funding until Dec. 15, drawing fire from the WhiteHouse and Democrats for opening the door to another potentialgovernment shutdown just before Christmas.

The Senate plan would keep the government open longer, untilJan. 15.

The chaos raised questions about what the House willultimately be able to pass and stoked 11th-hour uncertainty.

"We're going to continue to work with our members on bothsides of the aisle to try to make sure that there is no issue ofdefault, and to get our government reopened," House Speaker JohnBoehner told reporters after the closed-door meeting.

If Congress fails to reach a deal by Thursday, checks wouldlikely go out on time for a short while for everyone frombondholders to workers who are owed unemployment benefits. Butanalysts warn that a default on government obligations couldquickly follow, potentially causing the U.S. financial sector tofreeze up and threatening the global economy.

The U.S. Treasury Department seized on Fitch's downgradethreat to press Congress. "The announcement reflects the urgencywith which Congress should act to remove the threat of defaulthanging over the economy," a Treasury spokesperson said.

After the Fitch announcement, S&P 500 futures fell9.6 points while Dow Jones industrial average futures sank 60 points and Nasdaq 100 futures fell 7.5 points.

FITS AND STARTS

In the coming hours, much of the focus will be on Boehnerand whether he agrees to the demands of the more conservativewing of his party.

Conservative House members, driven by the Tea Partysmall-government faction, have continued to push for changes toObama's healthcare law as part of any budget deal.

Those demands sparked the partial government shutdown thatbegan with the dawn of the new fiscal year on Oct. 1,temporarily throwing hundreds of thousands of governmentemployees out of work.

Earlier on Tuesday, lawmakers expressed hope that the Senatecould vote as soon as Wednesday on a deal being hashed outbetween Senate Democratic Leader Harry Reid and RepublicanLeader Mitch McConnell.

"We were on track and Boehner stepped in," Richard Durbin ofIllinois, the No. 2 Senate Democrat, told reporters. "McConnellis waiting on Boehner and Boehner is waiting on his caucus."

The House Republican proposal initially floated on Tuesdaywould have funded the government through Jan. 15, and raised the$16.7 trillion debt ceiling by enough to cover the nation'sborrowing needs through Feb. 7, similar to the Senate plan,aides said.

But unlike the Senate, it would have included the two-yearsuspension of the medical device tax included in Obama'shealthcare law, and a requirement that members of Congress andthe administration be covered under the law.

Both House versions would not have allowed the U.S. Treasuryto renew its extraordinary cash management measures to stretchborrowing capacity for months, which had tentatively beenallowed under the Senate plan.

Numerous polls show Republicans have taken a hit in opinionpolls since the standoff began and the government shutdown. AWashington Post/ABC News poll released on Monday found that 74percent of Americans disapprove of the way congressionalRepublicans have handled the standoff, compared with a 53percent disapproval rating for Obama.

Another survey released by Gallup on Tuesday showed Americanconfidence in the U.S. economy fell another five points lastweek as the government shutdown continued.

The crisis is the latest in a series of budget battles inrecent years that have hurt consumer confidence and weighed onthe economy. A Monday estimate by the Peter G. PetersonFoundation, a think tank, said the uncertainty from the frequentshowdowns had boosted the unemployment rate by 0.6 of apercentage point, or the equivalent of 900,000 jobs since late2009.

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