Fallback plan gains traction in U.S. debt talks

WASHINGTON,  (Reuters) – With time running short in  U.S. debt talks, Republican and Demo-cratic senators sought yesterday to craft a plan that could avert an unprecedented  government debt default while making modest cuts in the  deficit.

Aides to President Barack Obama said he still holds out  hope for a “grand bargain” that would combine a deal for up to  $4 trillion in deficit reduction with an agreement to raise the  country’s borrowing limit.

But there were few signs of progress as the Aug. 2 deadline  to avoid a default drew dangerously close.

Behind the scenes, Senate Republican leader Mitch McConnell  and Senate Democratic leader Harry Reid were negotiating over a  fallback plan proposed by McConnell that would allow Obama to  raise the debt limit while sparing Republicans from having to  vote in favor of it.

Senior Democratic aides said the U.S. Senate will likely  begin considering the compromise measure this week. They  predicted the Democratic-led Senate would pass the legislation,  but winning over the Republican-led House of Representatives  would pose a bigger challenge.

“Barring a breakthrough, this is going to be the plan,” one  congressional aide said. “We are working under the assumption  that there won’t be a (deficit) plan.”

Making the rounds on the Sunday morning talk shows, White  House budget director Jack Lew told CNN’s “State of the Union”  program he believed that all of the leaders in Congress  “understand it would be irresponsible to get to Aug. 2 and not  extend the ability of the United States to pay its  obligations.”

If Congress does not raise the $14.3 trillion limit on U.S.  borrowing by then, the government will run out of money to meet  all it’s payments. Economists and administration officials have  warned this would trigger a crisis in global financial markets  and plunge the United States into another recession.

STILL TIME?      

Obama’s quest for a debt-limit increase and a $4 trillion  deficit reduction deal hit a major obstacle a week ago when  Republicans in Congress rejected his demand that tax increases  on the wealthy be part of the plan.

Lew told NBC’s “Meet the Press” that there was still time  to get a big deal done. “The president has made it clear he  wants to do something substantial,” he said.

But a growing number of private-sector experts believe the  solution to the debt standoff might lie in the “Plan B”  sketched out by McConnell.

That proposal would involve a convoluted legislative  maneuver to raise the debt limit in three stages. It would put  the burden on Obama’s Democrats to approve the increase, but,  in its initial form, it would not require spending cuts.

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