Obama faces new obstacles in high-stakes debt talks

WASHINGTON, July 10 (bdnews24.com/Reuters) - President Barack Obama will seek "the biggest deal possible" in talks on Sunday aimed at averting a debt default after Republicans shied away from a $4 trillion deficit-reduction deal because it would raise taxes.

Obama and the top U.S. Republican, House of Representatives Speaker John Boehner, are to meet with other congressional leaders at 6 p.m. EDT (2200 GMT) at the White House for high-stakes deliberations with an August 2 deadline looming larger.

Failure to seal a deal by August 2 could mean the first-ever default on the nation's financial obligations, which the White House and private economists warn could push the United States back into recession and trigger global financial chaos.

Boehner, facing stiff opposition from fellow Republicans over the prospects of higher taxes as part of a large-scale $4 trillion budget deal, told the Democratic president on Saturday he would only pursue a smaller, $2 trillion package.

The move threatened to throw Sunday's meeting into disarray. It followed Democratic complaints to Obama -- whose 2012 re-election prospects are tightly linked to U.S. economic health -- that he should not agree to any reforms of popular entitlement programs that would lead to benefit cuts.

Calling it a "grave moment for the country," Treasury Secretary Timothy Geithner told NBC's "Meet the Press" that Obama and the Democrats would try to get the "biggest deal possible" and that failure to act could lead to catastrophic damage to the fragile U.S. economy.

"It's going to require both sides to compromise. The president's bringing both sides together again at the White House this evening to try to figure out how to move forward," he said.

White House chief of staff William Daley told ABC's "This Week With Christiane Amanpour" that "there's no question in my mind" that a default will be avoided. "I'm confident of that."

Daley said the White House believed a deal of around $4 trillion was needed to "send a statement to the world that the U.S. has gotten hold of their ... fiscal problems."

Aides to Obama and Boehner had been working on a far-reaching package of spending cuts and new revenue that would have reduced deficits by $4 trillion over 10 years and cleared the way for lifting the $14.3 trillion cap on the government's borrowing capacity.

DAMPENED HOPES

But Boehner's move dampened hopes of any immediate compromise and raised doubts about the chances that Sunday's talks would start moving the budget debate toward an end-game.

"Despite good-faith efforts to find common ground, the White House will not pursue a bigger debt reduction agreement without tax hikes," Boehner, the top Republican in Congress, said in a statement. "I believe the best approach may be to focus on producing a smaller measure."

Senate Republican leader Mitch McConnell, appearing on "Fox News Sunday," said, "Nobody's talking about not raising the debt ceiling," and said he was "for the biggest deal possible too. It's just that we're not going to raise taxes in the middle of this horrible economic situation."

McConnell said he believed the sweeping $4 trillion package was off the table and suggested Republicans have an alternative idea to avoid a default up their sleeves.

Asked if there was a contingency plan to avoid a default, McConnell said with a smile: "There's always a contingency plan."

Conservatives believe deep spending cuts are needed to get the budget under control and are urging congressional Republicans not to bow to pressure for tax increases on the wealthy from Democrats, who want to shield popular domestic programs from huge cuts.

"This debt ceiling debate is the perfect time to do what must be done. We must cut," said former Alaska Governor Sarah Palin, the Republican vice presidential nominee in 2008.

Democratic Representative Chris Van Hollen, on CNN's "State of the Union," accused Republicans of taking an uncompromising stance -- "essentially providing a form of extortion, 'if you don't agree to deficit reduction the way we want it.'"

Republicans -- under pressure from Tea Party conservatives -- reject any increased taxes and want curbs on popular benefit programs such as Medicare, Medicaid and Social Security.

Republican Senator Jim DeMint, a Tea Party favorite, told Fox he believed Geithner was "playing Chicken Little here" with the default deadline. "The fact is, we will pay our debts if it's the last dollar we have."

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