U.S. lawmakers hope Senate leaders can break fiscal impasse as deadline looms

Reuters

By Paul Eckert and Lisa Lambert

WASHINGTON, Oct 13 (Reuters) - U.S. lawmakers voicedtentative optimism Sunday that fiscal crisis talks betweenSenate leaders would pave the way to a deal to avert agovernment default and reopen the government, but Democrats andRepublicans remained far apart on details.

As the clock ticked down to a Thursday deadline for raisingthe U.S. debt ceiling, necessary to avoid a possible governmentdefault that would roil world financial markets, both Democraticand Republican senators said the fact their leaders were meetingrepresented progress.

"It's a breakthrough. Hard to imagine, but it's abreakthrough," Dick Durbin, the second-ranking Democrat in theSenate, told NBC's "Meet the Press" program.

"The conversation that started yesterday between Senator(Mitch) McConnell - the Republican Senate leader - and Senator(Harry) Reid I think has the promise of finding a solution," hesaid.

Reid, the Senate majority leader, and McConnell held aninitial session on Saturday and agreed to meet again on Sunday.

Saturday's meeting, however, failed to dispel uncertaintyabout their ability to reach an agreement quickly to end apartial government shutdown and increase the nation's borrowingauthority.

Durbin offered no concrete reason for optimism, stressingthe dire consequences of failure and his hope that "sensiblepeople prevail" in a crisis that began with a partial governmentshutdown on Oct. 1.

"I don't want to be overly optimistic, but there's a lot atstake," said the Illinois Democrat.

Ohio Republican Senator Rob Portman said he also expectedthe two sides could reach a deal by Thursday.

Appearing on CNN's "State of the Union," Senators SusanCollins, a Republican, and Amy Klobuchar, a Democrat, agreedthat a solution will be reached by Reid and McConnell beforeThursday.

Among the unresolved issues are the duration of the debtceiling increase and the level of spending Congress will approvewhen it finally agrees on a bill to reopen the government.

Democrats are attempting to use the negotiations to raisespending above the levels authorized by the "sequester"-stringent across the board budget cuts that took effect inMarch, with more reductions set for January.

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.

Washington's debt ceiling drama played out as anxious globalfinancial leaders gathered in the U.S. capital for annualmeetings of the International Monetary Fund and Group of 20major industrialized and emerging economies.

World Bank President Jim Yong Kim on Saturday warned theUnited States was just "five days away from a very dangerousmoment" unless politicians produce a plan to avoid default.

"If this comes to pass, it could be a disastrous event forthe developing world, and that will in turn greatly hurtdeveloped economies as well," he told reporters after a meetingof the bank's Development Committee.

Meanwhile, U.S. stock investors, who were hoping to leavepolitics aside to focus on fundamentals, are likely to be morebearish on Monday amid expectations that talks to resolve thecrisis will go down to the wire on Thursday.

The S&P 500 stock index generated two days of strong gainsin advance of the weekend on hopes that an agreement to raisethe $16.7 trillion federal borrowing limit was near.

But the lack of progress so far is expected to cause sellingpressure to resume as investors start thinking the negotiationsmay go right up to the Oct. 17 deadline to increase the debtceiling.

"This continual breakdown in talks likely won't have apositive effect on the markets," said Bonnie Baha, seniorportfolio manager at DoubleLine Capital in Los Angeles.

"If the U.S. breaches the debt ceiling and there's any hintwhatsoever that the U.S. will not meet their obligations ontime, then all bets are off. We're drifting into unchartedwaters here,' she added.

"There will probably be a negative reaction in the stockmarket but I think the pressure is really shifting to Washingtonnow," said William Larkin, fixed income portfolio manager atCabot Money Management in Salem, Massachusetts.

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