Senate Majority Leader Harry Reid
Senate Majority Leader Harry Reid, D-Nev. REUTERS

Facing a deadline to avoid a ruinous default, congressional leaders on Saturday braced for a tense weekend of negotiations to try to reach a compromise on a measure to increase in the country's $14.3 trillion debt limit.

Senate Democrats aimed to seize the initiative by pushing their deficit-cutting plan, but entrenched differences remained less than 100 hours before the government says it will no longer be able to borrow to pay its bills.

A sour mood prevailed on Capitol Hill as Senate Democrat leaders accused their Republican counterparts of refusing to talk to them after Senate Republican leader Mitch McConnell said he wanted to negotiate directly with the White House.

Back-channel talks held out the best hope for a compromise.

President Barack Obama urged lawmakers to strike a deal and avert what he has said would be an "inexcusable" default.

"There are multiple ways to resolve this problem," Obama, a Democrat, said in his weekly address. "Congress must find common ground on a plan that can get support from both parties in the House. And it's got to be a plan that I can sign by Tuesday."

The debt saga shifted to the Senate late on Friday after the Republican-controlled House of Representatives passed a deficit-cutting bill, breaking weeks of political inertia.

The Democrat-controlled Senate quickly killed that bill, as expected, but its earlier approval by the House lifted hopes that it could form part of a final compromise.

With the hope of picking up Republican votes, Senate Democratic leader Harry Reid modified his plan, taking elements of an earlier proposal put forth by McConnell.

But he declined McConnell's offer to vote on it immediately -- a sign that Reid does not yet have enough support.

The Senate now is expected to hold that vote early on Sunday morning, setting up final passage on Monday morning, shortly before U.S. financial markets open.

Unless Congress raises the debt ceiling, the government would be barred from further borrowing after Tuesday, according to the Treasury, and could quickly run out of money to pay all its bills.

"The country's in crisis. This is not a time for politics as usual," Senator Charles Schumer, a Democrat, told a news conference.


McConnell wants to make sure the White House is involved to assure that any final package will make it past Obama's desk, Republican aides said.

Vice President Joe Biden, who has a rapport with McConnell from his years in the Senate, could emerge as a key player in the weekend talks.

"We are headed for a debt ceiling extension," said David Kotok, chairman and chief investment officer at Cumberland Advisors in Sarasota, Florida. "The risk is that some accident causes actual default. It's not likely but possible."

Investors and foreign governments are likely to remain on edge, though, as procedural hurdles will make it hard for Congress to send a deal to Obama until Monday night.

Reid's revised proposal, which would cut $2.2 trillion over 10 years, incorporates parts of a "backup plan" first proposed by McConnell. The new version would essentially give Obama the authority to raise the debt ceiling in three stages to cover U.S. 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.

The world has watched in growing alarm as political gridlock in Washington has brought the world's largest economy close to an unprecedented national default, threatening to plunge world markets and economies into turmoil.

U.S. stocks endured their worst week in a year as the uncertainty made investors shy away from riskier assets and the dollar slumped to a record low against the safe-haven Swiss franc. Much worse could be in store if a debt deal doesn't appear to be on track by the time markets open on Monday.

A late deal also raises the prospect of the United States losing its top-notch AAA credit rating, which could rattle markets and raise borrowing costs for Americans struggling with unemployment above 9 percent.

Obama has rejected suggestions that he could invoke emergency measures to unilaterally raise the debt ceiling in the event the parties fail to bridge their sharp ideological differences over taxes and spending.

With a final deal still in doubt, the government has begun to prepare Wall Street banks for the possible consequences of a default. One of the first casualties could be a planned quarterly sale of $42 billion in new Treasury bonds that might have to be delayed or canceled.

Some U.S. companies and private equity firms are also hitting the pause button on deals, fearing that a failure to reach a deal could raise financing costs.

"It's definitely having a chilling impact on people's ability to get deals done right now," said one top investment banker who declined to be identified.