Obama seeks "Plan B" as debt plans stall

A Republican plan to cut the U.S. deficit faced delay and stiff opposition on Wednesday, raising the risk of 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.

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.

Lawmakers need to carve out a budget plan to clear the way for Congress to raise the borrowing limit.

The chances of a quick resolution receded after a vote on a deficit plan by the top Republican in Congress was pushed back to Thursday from Wednesday.

Republican Speaker John Boehner rushed to rework his bill after an analysis found it would cut spending by $350 billion less than the $1.2 trillion over 10 years he had claimed.

President Barack Obama has threatened to veto the Boehner plan and top Senate Democrat Harry Reid described it as "dead on arrival."

The plan has also failed to win the backing of conservative Tea Party Republicans, who have steadfastly refused to back tax rises and want much heavier cuts to social programs that are traditionally protected by Obama's 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 as lawmakers feel the pressure from increasingly anxious financial markets.

The gridlock dragged global stocks down on Wednesday, particularly in Europe. 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 will 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.

Failure to reach a deal would have major implications. A Japan central bank policymaker warned 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," the minister said.

"WRAPPED UP IN A BOW"

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

Despite their differences -- sharpened by the looming presidential and congressional elections in November 2012 -- there is common ground between Boehner's bill and a rival plan by Reid that calls for a $2.7 trillion deficit reduction over the next decade.

Reid said he could not understand why Republicans did not support the plan he presented since it does not raise taxes and the spending cuts in the proposal have been endorsed by them.

"It's everything Republicans have demanded wrapped up in a bow and delivered to their door," he said.

Obama has said he cannot accept Boehner's two-step deficit plan because it extends the Treasury's borrowing authority only until early next year, risking a rerun of the debt impasse during the election campaign.

Obama, who will run for a second term, has backed Reid's one-step plan, which has a hike to the $14.3 trillion debt limit that would carry through the elections.

Neither plan goes far enough with deficit cuts to guarantee the U.S. sovereign credit rating will not be downgraded, an action that would dent the global safe-haven status of the dollar and Treasury bonds.

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.