Bid to break debt impasse faces new obstacles

A Republican proposal to cut the U.S. deficit faced delay and stiff opposition on Wednesday, raising the risk of a debt default and a ratings downgrade as the clock ticks toward a deadline less than a week away.

Deeply divided Republican and Democratic leaders are scrambling to find common ground before August 2, when the government is expected to hit its $14.3 trillion borrowing limit that could trigger a default and roil world markets.

Even if that fate is avoided, a budget plan that flinches from hefty cuts in the deficit could result in a downgrade of America's top-notch credit rating, raising borrowing costs and dealing a severe blow to the country's weak economic recovery.

The prospect of a quick resolution suffered another setback when a vote on a deficit reduction plan offered by House of Representatives Speaker John Boehner, the top Republican in Congress, was pushed back to Thursday from Wednesday amid opposition by fellow Republicans as well as Democrats.

Republicans control the House and President Barack Obama's Democrats control the Senate.

A competing plan crafted by Senate Majority Leader Harry Reid, a Democrat, also faced a setback on Wednesday when the non-partisan Congressional Budget Office said the proposal would cut $2.2 trillion from deficits, about $500 billion less than Democrats had claimed.

Boehner rushed to rework his proposal after a Congressional Budget Office analysis on Tuesday found it would cut spending by $350 billion less than the $1.2 trillion over 10 years he had claimed.

Lawmakers need to carve out a deficit reduction plan to clear the way for Congress to raise the borrowing limit. But complications surrounding the rival proposals could mean efforts to forge a compromise will go right down to the wire.

In an interview on MSNBC, Representative Steny Hoyer, the No. 2 House Democrat, promoted Reid's proposal as a solution to the deadlock, saying it reflects what Boehner wants -- "no new revenues, no new taxes, cuts equal to the extension of the debt limit." But Republicans have deep misgivings about it.

The gridlock dragged global stocks down on Wednesday, particularly in Europe, and major U.S. stock exchanges opened lower by at least 1 percent in early trading.

Worried investors shifted funds into traditional safe havens gold and the Swiss franc, which both rose to record highs in dollar terms.

The cost of insuring against a U.S. debt default in the next year increased to a record high.

Still, there have been no signs of panic in markets because most investors expect a deal to be struck by the deadline.

"The market is expecting both sides to take it to the edge, to push it as long as possible given the politics and given the cost to any side which backs down and loses one of its core interests too early on," said Stephen Green, head of research for Greater China at Standard Chartered Bank.

However, the bank's Chinese clients take a more pessimistic view on America's longer-term fiscal health, Green said.

"Many of them look at the politics in the U.S. and see that it's so dysfunctional that they're losing hope that the U.S. can actually get its fiscal house in order," he told Reuters.

JAPAN, FRANCE WORRIED

Failure to reach a deal would have major implications. A Japan central bank policymaker said a U.S. default or a ratings downgrade would be felt well beyond the United States.

"As the world's biggest economy, the U.S. would have an immeasurable impact on global financial markets and Japan would not escape the damage," said Hidetoshi Kamezaki, a board member of the Bank of Japan.

France's budget minister, Valerie Pecresse, urged Washington to come to an agreement. "The global economy needs an American agreement," Pecresse said.

After weeks of acrimonious debate, the contours of a possible deal have emerged but Republicans and Democrats are digging their heels in on some key demands and blaming each other for putting politics ahead of the national interest.

Obama has threatened to veto the Boehner plan if it wins congressional passage. Reid described it as "dead on arrival."

The plan has also failed to win the backing of Republicans aligned with the conservative Tea Party movement. They have refused to back tax hikes and want deeper cuts to social programs traditionally protected by the Democrats.

The White House said on Tuesday it was working with Congress to craft an unspecified "Plan B," providing a glimmer of hope that an 11th-hour deal could be reached.

Americans also are overwhelmingly concerned about the crisis, a Reuters/Ipsos poll showed. A majority -- 56 percent -- support a mixture of tax increases and spending cuts that Obama has advocated and Republicans have dismissed.

All three big credit-rating agencies have warned the United States needs to come up with a credible deficit plan to keep its top AAA rating in the long term.

Executives from Standard and Poor's and Moody's Investors Service are due to appear before a congressional panel on Wednesday, where they will face scrutiny over their views on the debt ceiling debate.

Obama and Treasury Secretary Timothy Geithner have stressed the government will run out of room to borrow funds on August 2, next Tuesday.

But Treasury officials have never said when the government will exhaust its funds to pay the nation's bills and the consensus among Wall Street analysts is that the cash will not run out until about two weeks later than that.