U.S. Senate leader sees chance for breaking fiscal impasse

Reuters

* Senate Democrat Reid says negotiations 'substantive'

* Offers little concrete information

* IMF's Lagarde warns of "massive disruption" to globaleconomy

* Asian shares fall, safe-haven Japanese yen rises

* Thursday debt ceiling deadline approaching

By David Lawder and Tim Reid

WASHINGTON, Oct 13 (Reuters) - U.S. Senate negotiations tobring a fiscal crisis to an end showed signs of progress onSunday, but there were no guarantees the federal governmentshutdown was about to end or that a historic debt default wouldbe avoided.

IMF chief Christine Lagarde warned of "massive disruption"to the global economy if the U.S. debt ceiling, which will bereached on Thursday, was not lifted. That is when the U.S.Treasury runs out of authority to borrow money.

"We would be at risk of tipping, yet again, into recession,"Lagarde said in an interview broadcast on NBC's "Meet the Press"program.

Friday's optimism that a deal might be forged over theweekend vanished on Saturday and the talks moved from theacrimony of the House of Representatives to the Senate.

Senate Majority Leader Harry Reid and Republican leaderMitch McConnell held talks that Reid later called "substantive".Reid did not provide details, but his remarks gave some hopethat Congress soon might pass legislation to fund the government- in shutdown mode since Oct. 1 - and raise its borrowingauthority.

"I'm optimistic about the prospects for a positiveconclusion to the issues before this country today," Reid saidbefore closing the Senate for the day.

Earlier on Sunday, McConnell issued a statement calling onDemocrats to accept a bipartisan plan that would end thegovernment shutdown and raise the borrowing authority.

Both the Senate and House are scheduled to be in session onMonday, even though it is the Columbus Day federal holiday.

However, whatever deal the Senate might reach will stillhave to return for approval by the House, where the Republicanmajority faces strong pressure from its vocal conservative flanknot to make concessions to President Barack Obama and hisDemocratic Party.

With time running out to reach a deal, MSCI's broadest indexof Asia-Pacific shares outside Japan fell 1.1percent on Monday while the safe-haven Japanese yen rose. TheTokyo stock exchange was shut for a public holiday.

U.S. stock index futures fell 0.7 percent toindicate a weaker opening on Wall Street.

U.S. stocks had risen strongly ahead of the weekendon hopes a deal to raise the $16.7 trillion federal borrowinglimit was near. Failure to raise the debt ceiling would leavethe world's biggest economy unable to pay its bills in thecoming weeks.

Banks and money market funds are already shunning someTreasuries normally used as collateral for short-term loans, asign that a deadlock over the debt ceiling could disrupt a keysource of day-to-day funding in the financial system.

CONGRESS COULD KICK INTO GEAR

On Saturday, House Speaker John Boehner informed hisrank-and-file that negotiations with the White House hadcollapsed.

What started as a Republican effort to fight Obama'ssignature healthcare reform law by depriving it of funds andblocking a budget agreement has morphed into a stalemate onother issues.

"I don't even understand, at this moment, what this isabout," said Democratic Senator Claire McCaskill.

Senator Dick Durbin, the second-ranking Democrat, boiled thefight down to a couple of seemingly easy matters to resolve: thesize of the increase in Treasury's borrowing authority and howmuch the government would be allowed to spend in a temporaryfunding bill after money ran out with the Sept. 30 fiscalyear-end.

Nonetheless, Democrats and Republicans jockeyed to win addedprovisions to those two basic issues, slowing the talks.

While McConnell urged Democrats to accept a bipartisan planthat had been developing for several days, some senators andtheir aides said details were still being worked out on the verymeasure the top Republican was touting.

If those discussions progress, the normally slow-movingCongress could kick into high gear.

In 2011, during the last major battle over the debt limit, adeal was announced the night of July 31 of that year. By Aug. 1,the House of Representatives had passed a bill; the next day theSenate went along and hours later, Obama had signed it into law.

Even so, the 2011 fight went down to the wire and thisyear's battle seems to be shaping up no differently. If a dealis reached, lawmakers could be voting on it as late as Wednesdayor Thursday.

FOREIGN AND DOMESTIC CRITICS

China's state news agency Xinhua called for an end to the"pernicious impasse" and said it was time for a "de-Americanizedworld". China is among the largest foreign holders of U.S. debt.

"The United States is the world's largest economy. We hopethey can shoulder their responsibilities," said Hua Chunying, aforeign ministry spokeswoman, told a regular briefing on Monday.

In Washington, U.S. veterans' and conservative Tea Partygroups protested the government shutdown, taking down barricadesaround the World War Two memorial on the National Mall beforemarching to the gates of the White House.

Police officers, some in riot gear, pushed back against thecrowd when it got too close to the White House fence, creating abrief flashpoint of anger.

The rally included speeches from Sarah Palin, a hero of the Tea Party movement and former Republican governor of Alaska, andTed Cruz, a freshman Republican senator who has crusaded againstObama's healthcare law.

Cruz played a key role a few weeks ago in stoking Tea Partyfervor against Obamacare and encouraged conservative Housemembers to hold out for major changes to the law even if itmeant a partial government shutdown.

They have not won any changes to the law. Since then, HouseRepublican leaders' efforts to broker a way out of the standofffailed, leaving senators to try to find a deal.

"Here's what I'm worried about: a deal coming out of theSenate that a majority of Republicans can't vote for in theHouse," Republican Senator Lindsey Graham told ABC's "ThisWeek".

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