Democrats weigh short-term US debt limit increase

WASHINGTON,  (Reuters) – President Barack Obama and  Senate Democrats are weighing a scaled-back U.S. budget deal  that would avert a looming default but force Congress to tackle  the politically toxic issue again before the 2012 elections, a  Senate Democratic aide told Reuters yesterday.

The deal would cover the country’s borrowing needs for  seven months, the aide said. That would theoretically include  budget savings of roughly $1 trillion to attract the Republican  support needed to pass it through Congress.

Congress must raise the $14.3 trillion debt ceiling by Aug.  2 to avoid a default that could push the United States back  into recession and send financial markets plummeting.

There has been no progress since talks collapsed last week  over tax hikes. Democrats say spending cuts should not be the  only component of a deficit-reduction package that would make  it easier for lawmakers to sign off on further borrowing.

The White House believes a deal needs to be in place by  July 22 to give Congress enough time to pass it, according to  Democratic officials familiar with the talks.

Bank regulator Sheila Bair said markets could be spooked  well before Aug. 2 if they see no signs of progress.

“Why even go there? Why even flirt with it?” Bair, the  outgoing chairman of the Federal Deposit Insurance Corp., told  the Senate Banking Committee.

Senate Democratic Leader Harry Reid canceled a planned  break during the week of the July 4 Independence Day holiday to  keep the Senate in session at Obama’s request.

“We’re working on a number of different proposals,” he told  reporters. “We discussed four of them with the president  yesterday.”

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