Senate seeks deal to avoid U.S. default as time runs short

By Susan Heavey

WASHINGTON (Reuters) - U.S. lawmakers in the Senate said on Monday they hoped to reach a deal soon to reopen the government and avert a looming default as investors worried that Republicans and Democrats might not be able to resolve their differences by a Thursday deadline.

After weekend negotiations proved fruitless, senators from both parties said they still thought they could reach agreement in the coming hours. With the most unrealistic demands off the table, the two sides were trying to craft a temporary measure that would allow Washington to step back from the ledge.

"I'm hopeful we can have something meaningful by the end of the day," Republican Senator Roger Wicker of Mississippi said on MSNBC.

The Treasury Department says it cannot guarantee that the U.S. government will be able to pay its bills past October 17 if Congress does not raise the $16.7 trillion debt ceiling by then.

It's not clear whether Congress can meet that deadline. Even if Republicans and Democrats in the Senate reach agreement on Monday, hard-liners such as Texas Republican Senator Ted Cruz might be able to delay a vote for several days.

The House of Representatives also would need to sign off on the plan. Republican leaders there face strong pressure from a vocal conservative flank that is deeply reluctant to make concessions to President Barack Obama and his Democrats.

Many say they won't back any deal that doesn't undercut Obama's 2010 healthcare reform law, the Affordable Care Act - a non-starter for Democrats.

"We've got to draw some lines in the sand now. This, to me, is an epic battle over Washington versus America, and I hope America wins," Republican Representative Matt Salmon of Arizona said on CNN.

Analysts expect that any deal is likely to come down to the wire.

Though Treasury likely will have enough cash on hand to meet its obligations for a week or so, it might be forced to pay a higher interest rate on the bonds it is due to issue on Thursday.

Banks and money market funds are already shunning some government bonds that are normally used for short-term loans. In China, the largest foreign holder of U.S. debt, the state news agency Xinhua said it was time for a "de-Americanized world."

U.S. stocks fell at the open on Monday. The S&P 500 Index was down 0.53 percent and the Dow Jones Industrial Average was down 0.48 percent by mid-morning.

The ongoing government shutdown is beginning to weigh on the economy as well. The hundreds of thousands of federal employees who have been temporarily thrown out of work are likely to get back-pay when the standoff is resolved. But they aren't getting paid now, forcing many to dial back on personal spending and cancel holiday travel plans.

Any agreement that would come in the following days would not resolve disagreements over long-term spending and the Affordable Care Act that led to the standoff in the first place. Despite the objections of rank-and-file conservatives like Salmon, many Republicans are eager to move the discussion away from "Obamacare" and toward possible spending cuts.

"All of us now are talking about spending, which is where we should have been in the first place," Republican Senator Bob Corker of Tennessee said on MSNBC.

Republicans have floated plans that would push back any possible default for several weeks and keep the government open for several months, but Democrats say that would simply set up another market-rattling confrontation which could spook consumers and further weigh on the economic recovery.

"If we just extend this to January, we'll be right back in the middle of this," Democratic Senator Mark Begich of Alaska said on MSNBC. (Writing by Andy Sullivan; Editing by Karey Van Hall and Claudia Parsons)