A Republican deficit reduction plan headed for two major votes in the U.S. Congress on Thursday and its expected demise could force a bipartisan compromise to avert an unprecedented debt default.
The maneuvers in the divided Congress signaled no immediate end to the feuding that has brought the United States to the brink of an economic crisis. There were still hopes a compromise could be hammered out five days before an August 2 deadline to raise the U.S. government borrowing limit.
World markets, unnerved by the risk of a U.S. default and a credit downgrade, were watching anxiously. Top U.S. financial executives added their voices to a chorus of calls from the business community for Congress to make a deal that would banish the specter of default.
President Barack Obama's priority was to "lift the cloud and make sure that the United States does not default," White House spokesman Jay Carney told reporters, urging Congress to end its partisan battle and deliver a compromise deal.
It was unclear whether the deficit reduction bill presented by House of Representatives Speaker John Boehner, the top Republican in Congress, would overcome objections from conservative rebels in his own party and pass the Republican-controlled House on Thursday. A vote was tentatively scheduled for between 5:45-6:15 p.m. EDT .
The Democratic-controlled Senate would vote on the Boehner bill afterward and it would be defeated in that chamber, Senate Majority leader Harry Reid said.
Hopes for a deal were pinned on a compromise emerging after that.
"The markets are going to be on tenterhooks until we get an understanding of what the quality of the package is," said Kevin Caron, market strategist at Stifel, Nicolaus & Co in Florham Park, New Jersey.
Republican and Democratic congressional leaders have been in touch throughout the week, according to lawmakers and aides. But they will not be able to begin serious negotiations on a final compromise until the option now on the table -- Boehner's bill -- is defeated either in the House or the Senate.
The White House's Carney said the debt stalemate had "already had significant negative impact on the economy."
"The American people have made clear they want a compromise," Carney said. "Our primary objective has to be to protect the economy and the American people from economic harm."
While most analysts hope a default will be avoided by an eleventh-hour deal, the risk remains for a damaging downgrade of the United States' top-notch credit rating, a move that would raise U.S. borrowing costs and rattle global investors.
A failure to raise the debt limit by August 2 could trigger a payments crunch that would shake the global financial system and could tip the United States back into recession.
FINANCIAL CHIEFS WARN AGAINST "INACTION"
Reflecting nervousness in the business community, chief executives from the largest U.S. financial firms sent a letter to Obama and members of Congress urging them to compromise to avert default.
"The consequences of inaction -- for our economy, the already struggling job market, the financial circumstances of American businesses and families, and for America's global economic leadership -- would be very grave," they said.
Nervousness over whether the U.S. Treasury will be able to meet debt obligations in August increased on Thursday, and investors were closely watching to see if the Treasury will unveil a plan over how it may prioritize payments.
Rates on Treasury bills maturing on August 4, two days after the Treasury has warned it may run out of cash, rose to around 18 basis points, up from 12 basis points on Wednesday and from around zero as little as two weeks ago.
The cost of borrowing in the repurchase markets, a key source of fixed-income funding, also rose as investors grew reluctant to hold Treasury securities, preferring cash.
Boehner has been cajoling rebels within his own party, aligned to the fiscally conservative Tea Party movement, to support his deficit-cutting bill, which does not deliver the severe spending cuts they demand.
The Republican House speaker was more upbeat in a Thursday morning meeting with party members than on Wednesday, when he had urged them to "get your ass in line" behind the bill.
Thursday's meeting seemed like a pep rally as wavering lawmakers were applauded as they stood up to say they would support the bill. Representative Mike Kelly handed out signs that read "Play Like a Champion" in the colors of Notre Dame University, famed for its football program.
Opponents of the Boehner bill, such as Republican Study Committee chairman Jim Jordan, stayed silent at the meeting.
Boehner has little margin for error to get his bill passed in the House. The bill needs 217 votes to pass in the chamber with 433 members and two vacancies. There are 240 House Republicans, so if none of the 193 Democrats vote for the bill, 23 Republicans could also vote no and the bill would pass.
HOPES FOR COMPROMISE
In the hours leading up to the votes, the White House continued to call for a bipartisan pact.
White House spokesman Carney said a successful compromise must significantly cut spending, install a mechanism to tackle tax reform and entitlement spending in the future, and lift the debt ceiling through next year.
Boehner declined to say whether he would be open to compromise if the Senate defeats his bill, but indicated that he would keep the House in session this weekend.
After weeks of bickering and setbacks, some common ground has emerged between rival Republican and Democratic plans to cut the deficit and raise the debt limit.
A bill being pushed by Reid and backed by the White House would cut $2.2 trillion from the deficit over 10 years without raising taxes. Reid has said he is willing to incorporate elements of Boehner's plan into his in a way that could win support from both parties.
The concerns about the risk of a U.S. default and downgrade come as Europe is still struggling to stem its own debt crisis. Italy's borrowing costs soared at a bond auction on Thursday as investors worried about Rome's ability to cut its sovereign debt -- second only to Greece's in Europe at 120 percent of annual output.