U.S. still in fiscal deadlock, but glimmers of hope emerge

Reuters

* Obama shows some signs of flexibility

* Senator Portman floats proposal

* Still no sign of a breakthrough

* Stocks and dollar fall

By Richard Cowan and Mark Felsenthal

WASHINGTON, Oct 7 (Reuters) - A few faint glimmers of hopesurfaced on Monday in the U.S. fiscal standoff, both in Congressand at the White House, with President Barack Obama saying hewould accept a short-term increase in the nation's borrowingauthority to avoid a default.

Separately, a Senate aide said Republican Senator RobPortman, an Ohioan influential on budget issues, was floating aplan to cut federal spending and reform the U.S. tax code aspart of a broader deal to reopen shuttered government agenciesand raise the government's debt ceiling.

While Portman's initiative may or may not gain traction,most lawmakers believe that a budget deal like it will benecessary to end the stalemate.

Still, seven days into a government shutdown and only 10days from a critical need to raise the nation's debt limit,nothing amounting to a breakthrough was in sight.

Senate Democrats could introduce a bill to raise the debtlimit this week, according to a Democratic aide. Considering theprocedural roadblocks the measure could face, aides said theyhave to get the legislation rolling well before Oct. 17, whenTreasury Secretary Jack Lew has said the government will run outof borrowing authority.

It was uncertain whether Democrats can muster the 60 votesthey would need to push a debt ceiling bill, with no stringsattached, through the Senate. The measure would likely run intoopposition from Senate Republicans such as Texas Senator TedCruz, who has been leading the drive to make delaying Obama'shealthcare law a condition for raising the debt ceiling.

Democrats, and Obama, stepped up their criticism of House ofRepresentatives Speaker John Boehner for refusing to schedule avote on a separate unencumbered measure to fund the governmentand end the shutdown. They believe it would pass with mostDemocrats in the House voting for it along with a handful ofRepublicans. Boehner said Sunday that it would fail.

"If Republicans and Speaker Boehner is saying there are notenough votes, then they should prove it," said Obama.

Later on Monday, the House passed another of its targetedfunding bills, this time to reopen the Food and DrugAdministration, with 20 Democrats joining 215 Republicans. TheDemocratic-led Senate has rejected this approach, calling forre-opening the entire government.

Representative Lynn Westmoreland, a Georgia Republican, saidthe failure of the Senate to take up bills meant the governmentwas likely to stay shut until a deal is crafted over the debtlimit. "To me, we're into the debt ceiling fight now," he said.

Obama's press secretary, Jay Carney, told reporters thepresident would be willing to accept a short-term debt ceilingincrease in order to get past the potential crisis date of Oct.17 when the government hits the $16.7 trillion borrowing limit.

Carney said that while the White House would prefer raisingthe ceiling enough to last a year, "we have never stated andwe're not saying today that the debt ceiling ought to be or canbe any particular length of time."

A short-term increase would give Republicans and Democratssome breathing room, but by itself would not address thesubstantive issues preventing an agreement.

The last big confrontation over the debt ceiling, in August2011, ended with an 11th-hour agreement under pressure from shaken markets and warnings of an economic catastrophe if therewas a default.

OBAMA OPEN TO TALKS, AFTERWARDS

Obama said he is open to negotiations over his healthcarelaw, a slight change of tone, but only after Congress approvesmeasures to end a week-long government shutdown and raise theU.S. debt ceiling.

"As soon as that happens I am eager and ready to negotiatewith Republicans on a whole range of issues: how do we createmore jobs, how do we build the economy, how do we boostmanufacturing," said Obama, in a visit to the Federal EmergencyManagement Agency on Monday to spotlight the loss of governmentservices because of the shutdown.

"I'm happy to talk about healthcare. I'm happy to talk aboutenergy policy, how do we deal with our long-term fiscalsituation," he said.

Obama has been particularly resistant to any tampering withhis healthcare law, which has experienced a series of problemsin the initial rollout. Any negotiations over it would be aimedat tinkering with it to improve it, not gut funding for it asRepublicans want, White House aides have said.

Conservative Republicans in the House of Representativeshave resisted funding the government for the current fiscal yearuntil they extract concessions from Obama that would delay ordefund his signature healthcare law.

Many conservative Republicans, particularly in the House,want a similar condition placed on raising the debt ceiling, aswell as measures aimed at cutting deficits. They also play downthe impact of failing to raise the debt limit, arguing thegovernment could prioritize payments to cover bond interest andSocial Security retirement payments.

More moderate Senate Republicans disapproved of usingObamacare as a bargaining chip from the start, arguing that itbecause it is non-negotiable for Democrats, it would inevitablylead to a shutdown and sour voters on the Republican Party.

The latest polling is bolstering their concerns. In thelatest survey, by the Washington Post and ABC News, 70 percentdisapproved of the way Republicans in Congress are handling theconflict versus 61 percent who disapproved of congressionalDemocrats.

Obama came off the best, with 51 percent disapproving of hishandling of the crisis. The margin of error was plus or minus3.5 percentage points.

A Senate Republican aide, who asked not to be identified,said that Portman's proposals were in an early stage, but itcontained elements that could be acceptable to both sides.

Under the proposal, Obama would win a full year ofgovernment funding, instead of a short-term spending billlasting several weeks that would have to be renegotiated inNovember or December, the aide said.

Republicans would get the strict across-the-board spendingcuts that currently are in place, which many liberal Democrats,and some more centrist Republicans, want to scrap.

In addition, the fiscal package would contain $600 billionin savings over 10 years that already have been proposed byPresident Barack Obama in his budget submissions to Congress.

The aide said the savings would come mainly from "mandatory"programs. Those generally refer to Social Security, Medicare andMedicaid, the benefit programs for retirees and for the elderlyand poor to receive healthcare.

The remaining piece of the puzzle would be instructions totax-writing committees in Congress to write legislation by nextyear to reform the tax code in a way that would help furthergrow the U.S. economy.

LIMITED ROOM

The aide said that Portman has floated the idea to otherRepublican senators, including Senate Republican leader MitchMcConnell, as well as some Democrats.

Obama has limited room to negotiate on Social Security andMedicare thanks to his own Democrats, who have in the pastresisted cuts to those programs.

Boehner vowed on Sunday not to raise the U.S. debt ceilingwithout a "serious conversation" about what is driving the debt,while Democrats said it was irresponsible and reckless to raisethe possibility of a U.S. default.

Financial markets showed signs of growing anxiety on Mondayover the dispute. The dollar and global equity markets fell onMonday with the Standard & Poor's 500 Index closing down0.9 percent and the Nasdaq Composite Index dropping 1percent.

The three main credit rating agencies have all warned thatthe United States rating could be cut should it hit an expectedOct. 17 deadline when Washington is set to run out of cash,endangering its ability to pay its debt.

The Pentagon said over the weekend that it would recallaround 350,000 of its furloughed civilian workers. The rest ofthe 800,000 or so federal employees idled by the shutdown facedanother week off the job.

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