By Richard Cowan and Roberta Rampton
WASHINGTON (Reuters) - U.S. senators said they were closing in on a deal Monday that would reopen the government and push back a possible default for several months, though many hurdles remained as a Thursday deadline drew near.
Ahead of a meeting with President Barack Obama, the Senate's top Democrat and top Republican both said they were optimistic that they could soon reach an agreement that would allow them to avert a looming default and end a partial government shutdown that has dragged on for 14 days so far.
"I'm very optimistic that we that we will reach an agreement that's reasonable in nature this week," Senate Democratic Leader Harry Reid said on the Senate floor.
Reid and his Republican counterpart, Senator Mitch McConnell, were due to meet at the White House later with Obama, Vice President Joe Biden, House of Representatives Speaker John Boehner, and House Democratic Leader Nancy Pelosi.
Any deal would also have to win approval in the House, where conservative Republicans have insisted that any continued government funding must include measures to undercut Obama's signature health law - a nonstarter for Democrats.
The White House meeting, originally set for 3 p.m. (1900 GMT), was postponed to give lawmakers more time for negotiations.
"My hope is that a spirit of cooperation will move us forward in the next few hours," Obama said after visiting a charity organisation for low-income families where some furloughed government workers have been volunteering.
The plan under discussion would raise the $16.7 trillion debt ceiling by enough to cover the nation's borrowing needs into 2014, according to Senate aides. It also would fund government operations through January 15, keeping in place the across-the-board "sequester" cuts that took effect in March.
The deal would not resolve the disagreements over long-term spending and health care that led to the crisis in the first place. It would amount to a clear retreat for Republicans who have sought to tie any continued funding and borrowing authority to measures that would undercut Obama's signature Affordable Care Act. Still, McConnell echoed Reid's comments that a deal could come together soon.
"I share his optimism that we we're going to get a result that will be acceptable to both sides," he said on the Senate floor.
The Treasury Department says it cannot guarantee that the U.S. government will be able to pay its bills past October 17 if Congress does not raise the $16.7 trillion debt ceiling by then.
A default would likely come by November 1 as Treasury would not have enough tax revenue coming in to cover interest payments, retirement benefits and other obligations.
WEIGHING ON THE ECONOMY
It is unclear whether Congress can meet that deadline. Even if Republicans and Democrats in the Senate reach agreement on Monday, hard-liners such as Texas Republican Senator Ted Cruz might be able to exploit Senate rules to delay a vote for several days.
Republican leaders in the House face strong pressure from a vocal conservative flank that is deeply reluctant to make concessions to Obama and his Democrats.
Though Treasury likely will have enough cash on hand to meet its obligations for a week or so, it might be forced to pay a higher interest rate on debt it is due to issue on Thursday.
Banks and money market funds are already shunning some government securities that are often used as collateral for short-term loans and to facilitate many other transactions. In China, the largest foreign holder of U.S. debt, the state news agency Xinhua said it was time for a "de-Americanized world."
U.S. stocks fell at the open on Monday but by the afternoon were showing gains, buoyed by prospects of a fiscal deal. The S&P 500 Index was up 0.33 percent while the Nasdaq Composite Index was up 0.56 percent.
The government shutdown, now in its 14th day, is beginning to weigh on the economy as well. The hundreds of thousands of federal employees who have been temporarily thrown out of work are likely to get back-pay when the standoff is resolved. But they aren't getting paid now, forcing many to dial back on personal spending and cancel holiday travel plans.
The crisis is only the latest in a series of budget battles in recent years that have repeatedly spooked investors and consumers. The uncertainty has weighed on the economy and boosted the unemployment rate by 0.6 of a percentage point, or the equivalent of 900,000 jobs since late 2009, according to a new estimate by the Peter G. Peterson Foundation, a think tank.
Any agreement that would come in the following days would not resolve disagreements over long-term spending and the Affordable Care Act that led to the standoff in the first place. Despite the objections of Tea Party faction conservatives, many Republicans are eager to move the discussion away from "Obamacare" and toward possible spending cuts.
"All of us now are talking about spending, which is where we should have been in the first place," Republican Senator Bob Corker of Tennessee said on MSNBC.
Throughout the shutdown, Obama has said Republicans must agree to reopen the government and extend the debt ceiling before the two sides can begin talks on spending or tweaks to his Affordable Care Act.
That position has not changed.
"We will not pay a ransom for Congress reopening the government and raising the debt limit," the White House said in a statement on Monday morning.
(Additional reporting by Thomas Ferraro, Tim Reid, Susan Heavey and Steve Holland; Writing by Andy Sullivan; Editing by Karey Van Hall, Claudia Parsons and Tim Dobbyn)