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Sat 30 Jul 2011 11:06 AM

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Bitter divide remains as US debt crisis deadline looms

Democrats, Republicans still at loggerheads over deficit cutting plan; deadline on Tuesday

Bitter divide remains as US debt crisis deadline looms
The National Debt Clock, a billboard-size digital display showing the increasing US debt, near an office of the Internal Revenue Service (IRS)on Sixth Avenue July 26, 2011 in New York. (AFP/Getty Images)

Democrats sought
to forge a last-ditch compromise with Republicans on Friday by offering a
concession to avoid a crippling US default, but a bitter divide
remained before Tuesday's deadline to raise the country's debt ceiling.

The Republican-controlled House
of Representatives approved a deficit-cutting plan and the
Democratic-led Senate quickly rejected it, moves that underscored the
ideological differences but also opened the way to start negotiating a
deal.

The back-to-back votes broke
weeks of political inertia in efforts to lift the $14.3 trillion (8.70
trillion pounds) US debt limit by Tuesday after which the world's
largest economy will be unable to pay all of its bills, the government
says.

But hopes for a quick
resolution faded as the Senate adjourned for the evening after a round
of parliamentary manoeuvring and finger-pointing, setting the stage for a
tense weekend in Washington.

Senate
Democratic Leader Harry Reid ceded some ground late on Friday when he
revised his own deficit-reduction proposal to incorporate parts of a
"backup plan" first proposed by the Senate's top Republican, Mitch
McConnell.

The new version would
essentially give President Barack Obama the authority -- and the blame
-- to raise the debt ceiling in three stages to cover US borrowing
needs through the 2012 elections when he is running for a second term.

Obama and his Democrats had hoped to avoid multiple votes before the election.

Despite the pressing deadline, progress towards an agreement did not appear imminent.

"They
are refusing to negotiate with us and all they do is talk," Reid told
reporters after the Senate vote, which like the House tally hewed to
party lines.

Delays and procedural
hurdles will still make it all but impossible for Congress to strike a
deal and send it to Obama's desk before Monday night at the earliest,
injecting further uncertainty into already rattled global financial
markets.

Even if a late deal can
be struck, the United States risks losing its top-notch AAA credit
rating, a once-unthinkable event for world financial markets that would
push up the U.S. cost of borrowing while the economy is still
struggling.

World leaders have
been stunned by the dysfunction in Washington. World Bank President
Robert Zoellick on Friday said the United States was playing with fire.

America's
largest foreign creditor, China, has repeatedly urged Washington to
protect its dollar investments and its state-run news agency on Friday
said the United States had been "kidnapped" by "dangerously
irresponsible" politics.

Wall
street ended its worst week in a year on Friday. The U.S. dollar plunged
to a record low against the Swiss franc, which is viewed by investors
as a safe haven currency.

In
short-term lending markets, investors dumped holdings over fears about
the talks, driving rates on Treasury debt that matures in August to
six-month highs.

The US Treasury
warned Wall Street firms it might delay or cancel a major round of bond
sales if Congress does not raise the debt limit in time.

Both
sides in Congress have been at impasse for weeks with lawmakers locked
in a blame game that has raised the risk of a potentially devastating
default, which could plunge America back into recession and trigger
economic turmoil globally.

Developments
gathered pace on Friday when Republicans pushed a deficit-cutting plan
through the House by a vote of 218-to-210 after the party's leaders
reworked the bill to appease anti-tax conservatives in their ranks.

The
legislation, denounced earlier by Obama who had admonished lawmakers to
stop wasting time and find a way "out of this mess," was always doomed
to defeat in the Senate where all of Obama's Democrats had vowed to vote
against it.

The Senate defeated the measure, 59-to-41.

"We
are moving a bit closer," said Axel Merk, president of Merk Investments
in Palo Alto, California. "We'll get an agreement, ultimately, but the
drama is going to continue to play out."

Senate Democrats had hoped to work out a compromise with Republicans on Friday but said McConnell refused to negotiate.

Immediately
after defeating the House bill pushed by Republican Speaker John
Boehner, Reid sought to sway some Senate Republicans by offering a
revised version of his plan that included elements from one McConnell
proposed weeks ago.

Through a
complex legislative procedure, Obama would be able to increase the debt
ceiling by $2.4 trillion in three stages but Republicans would have
political cover by not having to explicitly approve each case. The White
House has not ruled out accepting such a provision.

Republican
aides said McConnell wants to negotiate directly with the White House
to ensure that Democrats will be on board with any final deal.

Reid
will find out how many Republicans back his plan in a procedural vote
scheduled for 9am UAE time on Sunday. If all 53
Democrats back the plan they will need at least seven Republicans to
clear the 60-vote threshold.

A vote on its final passage, which requires a simple majority, could come on Monday morning.

Boehner's
failure on Thursday to quell a rebellion among Tea Party-affiliated
conservatives in his party exposed a rift among Republicans that has
hindered efforts to reach a deal.

But
Boehner brought enough of his recalcitrant Republicans onboard on
Friday with a retooled plan that included a requirement for Congress to
pass a balanced budget amendment to the Constitution and send it to the
states for ratification, a long-time core demand of fiscal
conservatives.

Boehner's two-step
plan would have cut spending initially by about $900 billion and lift
the debt ceiling only enough to last a few months. That would mean a
re-run of the acrimonious debate which Obama is determined to avoid at a
time when he will be deeper into 2012 re-election campaign.

Reid has said a short-term solution is unacceptable and is pushing for $2.2 trillion in cuts over 10 years.

Ratings
agency Moody's signalled it probably will not downgrade the United
States' triple-A credit rating immediately, even if there is no deal to
raise the debt ceiling, but a cut could come in the medium term. It said
the United States would still have enough money to pay its debts to
bondholders after Tuesday.

Rival
ratings agency Standard & Poor's has warned it could cut the rating
soon if there is no deal to address the underlying budget problems.