Tea party revolt holds possible debt deals hostage

WASHINGTON (Reuters) - A bill to cut the deficit faced a nail-bitingly close vote in Congress on Thursday as the top Republican lawmaker sought to quell an internal revolt and push his plan to avoid a ruinous default.

Approval of a plan by House of Representatives Speaker John Boehner would break the inertia in Washington over a debt crisis that has spooked markets and raised the prospect that the government of the world's largest economy will run out of money to pay its bills in less than a week.

President Barack Obama has threatened to veto the bill and a majority of the Democratic-controlled Senate has vowed to vote against it.

But a successful vote in the House would give the bill legitimacy and make it a crucial element of the legislative chess game that is likely to play out up to August 2.

That's when the Obama administration says it will run out of funds to pay the country's bills unless a $14.3 trillion borrowing limit is increased.

A defeat of the bill could deepen the crisis, swinging the momentum toward a rival Democratic plan in the Senate but leaving no clear way to overcome entrenched opposition from fiscally conservative Tea Party Republicans in the House.

As the brinkmanship over the ideologically charged dispute looks like it will go on through the weekend, investors and ordinary Americans are increasingly nervous that a previously unthinkable U.S. default could spark a new financial crisis.

Asian stocks slid more than 1 percent in thin volume on Thursday as investors nervously watched the clock tick down toward the debt ceiling deadline. European shares followed suit, sliding half a percent.

The Treasury says it will run out of spending money next Tuesday unless Congress agrees to raise the debt ceiling. Even if an 11th-hour compromise emerges, the United States could lose its top-notch credit status if ratings agencies are not convinced it has done enough to address its bulging debt burden.

The White House has warned of "catastrophic" consequences if a deal is not reached by August 2, rejecting the idea that Obama could invoke an obscure constitutional clause to raise the debt limit.

Several House Democrats planned to hold a news conference on Thursday to urge Obama to take that option if necessary.

"The only option here is for Congress to do its job," said senior White House adviser David Plouffe on the PBS television show "NewsHour."

"We've run out of excuses and we're running out of time."

After weeks of bickering and setbacks, some common ground has emerged between rival Republican and Democrat plans to cut the deficit and raise the debt limit.

A bill being pushed by top Senate Democrat Harry Reid and backed by the White House would cut $2.2 trillion from the deficit over 10 years without raising taxes.

Reid has said Boehner's plan would be "dead on arrival" but that he could incorporate elements of it in a way that could win support from both parties.

TOO CLOSE TO CALL

Boehner's two-step plan contains a crucial sticking point -- it would only extend the Treasury's borrowing authority by a few months, something Obama has said is unacceptable.

Democrat Obama is facing a major test of his leadership over the debt crisis as he seeks to remove the debt-ceiling issue as a threat to the weak economy ahead of his bid for re-election in November 2012.

Boehner's bill needs 217 votes and its chances appear too close to call even after he bluntly told fellow Republicans to "get your ass in line" behind his plan.

While some conservatives appeared to be reluctantly backing the bill, Tea Party groups are urging Republicans to reject any compromise, including Boehner's plan.

Investors have raised their holdings of safe-haven assets such as gold but have reacted relatively calmly to the prospect of an unprecedented U.S. default and a damaging credit downgrade, holding out hope that a late deal will be struck.

The dollar rebounded from recent losses on Wednesday and the Treasury managed to sell $12 billion in short-term bills and $35 billion in five-year notes, showing that bond investors still have faith in the U.S. government.

Still, ordinary Americans scarred by the 2008 financial crisis are growing more worried. They bombarded leading Congress members with telephone calls at the urging of Obama on Tuesday and financial advisers report a rise in calls asking about what to do if the government defaults.

The dysfunctional gridlock in Washington has also raised concern over the long-term decline of U.S. economic power and the status of the dollar as the world's reserve currency.

"The U.S. is experiencing an 'end of empire' moment and the dollar share of global reserves is likely to fall gradually," said Jim Leaviss, head of retail fixed income at M&G Investments in London.

(Additional reporting by JoAnne Allen; Writing by Stuart Grudgings and Emily Kaiser; Editing by Eric Walsh and Neil Fullick)

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