Focus of debt talks to narrow without deal by Friday, sources say

Washington (CNN) -- President Barack Obama and congressional negotiators will have to end their long-term deficit reduction talks and focus solely on finding a way to raise the federal debt ceiling if they fail to reach an agreement on spending cuts and tax hikes by Friday, according to two Democrats familiar with the talks.

Obama told negotiators Wednesday that he had set Friday as a deadline to decide whether a broad agreement on debt reduction is feasible.

The president is scheduled to meet behind closed doors at the White House with top congressional leaders on Thursday afternoon -- the fifth straight day of talks.

Administration officials have warned that a failure to raise the current $14.3 trillion debt ceiling by August 2 could trigger a partial default. If Washington lacks the money to pay its bills, interest rates could skyrocket and the value of the dollar could decline, among other things.

The seriousness of the situation was reinforced Wednesday when Moody's Investors Services -- a major rating agency -- said it would put the sterling bond rating of the United States on review for possible downgrade. Moody's said it had initiated the review because of "the rising possibility" that Congress will fail to raise the debt ceiling in time.

Wednesday's negotiations ended on a tense note with House Majority Leader Eric Cantor, R-Virginia, and Obama squaring off over the Republican's call for a short-term extension of the debt ceiling.

At one point, Obama said the political wrangling confirmed what the public considers to be the worst of Washington, according to Democratic sources familiar with the talks who spoke on condition of not being identified.

Multiple sources, also speaking on condition of anonymity, said Obama told the gathering that "this could bring my presidency down," referring to his pledge to veto any short-term extension of the debt ceiling. Sources say he vowed, "I will not yield on this."

The exchange concluded almost two hours of talks that failed to achieve a breakthrough.

Cantor claimed the Obama became "very agitated and said I've sat here long enough -- that no other president -- Ronald Reagan -- would sit here like this -- and that he's reached the point that something's gotta give."

Obama called for Republicans to compromise on either their insistence that a debt-ceiling hike must be matched dollar-for-dollar by spending cuts or on their opposition to any kind of tax increase, Cantor said.

"And he said to me, 'Eric, don't call my bluff.' He said 'I'm going to the American people with this,'" Cantor quoted Obama as saying.

"I was somewhat taken aback," Cantor said. When he continued to press the issue, Cantor said, Obama "shoved back from the table, said 'I'll see you tomorrow' and walked out."

Democratic sources provided a different take on the exchange, saying Obama cut off Cantor at the end after the GOP leader changed from his previously held position against a short-term extension of the debt ceiling.

Obama responded that he'd veto such a temporary measure, according to the sources, then went on to say that what was happening in the negotiations confirmed the worst of what the American people think about Washington.

According to the sources, Obama expressed frustration with the unwillingness of congressional Republicans to compromise and called on them to stop posturing and catering to their bases. He then ended the meeting, the Democratic sources said.

Senate Majority Leader Harry Reid, D-Nevada, said Thursday that "Cantor has shown he shouldn't even be at the table, and Republicans agree he shouldn't be at the table."

Obama has insisted on one deal that will raise the amount of money the government can borrow to sufficient levels to last through 2012 -- after his campaign for re-election. But Cantor's call for a short-term agreement could win the support of Speaker John Boehner, R-Ohio, an aide to Boehner said.

Democrats and Republicans remain at sharp odds over how to proceed. Obama has indicated a preference for a "grand bargain" that would save up to $4 trillion over the next decade through a combination of spending cuts, raising taxes on the wealthiest Americans and reforming politically popular entitlement programs such as Medicare and Medicaid.

GOP leaders remain adamantly opposed to any tax hikes, arguing that increasing the burden on "job creators" now would derail what has already proven to be, at best, a shaky economic recovery.

Earlier this week, Obama said he cannot guarantee that older Americans will receive their Social Security checks next month if a deal is not reached.

Testifying Wednesday on Capitol Hill, Federal Reserve Chairman Ben Bernanke warned that failure to raise the ceiling would create a "major crisis" and be potentially "catastrophic" for the global economy.
On Tuesday, Senate Minority Leader Mitch McConnell, R-Kentucky, unveiled what he characterized as a last-ditch plan to avert a default if negotiators can't reach an agreement. The Republican leader proposed three short-term increases in the amount the government can borrow while at the same time registering the disapproval of Congress for such a move.

McConnell's proposal would give Obama power to raise the debt ceiling by a total of $2.5 trillion, but also would require three congressional votes on the issue before the 2012 general election. The president would be required to identify spending cuts equivalent to each debt ceiling increase, though there would be no guarantee Congress would adopt the proposed cuts.

Some congressional Democrats have promised to consider the plan, despite Obama's opposition to any short-term extension. The plan's prospects are also uncertain, however, in the Republican-controlled House. Some conservatives have said the McConnell plan amounts to a capitulation to the Democrats.

In an interview Wednesday with Mandy Connell of WHAS radio, McConnell said his proposal was necessary because an acceptable deficit reduction deal was proving unattainable and the United States must avoid a default that would be "bad for Republicans."

"Given a choice between a bad deal and avoiding default, I choose to avoid default," McConnell said, adding that "if we were to go into default ... the practical effect of that will be to allow the president to make us co-owners of a bad economy."

He also said defaulting is "completely and totally unacceptable, and it's not going to happen."

After Wednesday's meeting, Cantor told reporters that "no one wants to rattle the markets."

For now, however, it remains unclear at best whether the two sides will be able to reach any agreement.

Cantor said that during Tuesday's negotiating session at the White House, Obama presented more details of his proposed cuts to entitlement programs. Republicans, according to Cantor, supported much of what they heard.

But on Wednesday, Cantor reiterated GOP opposition to higher taxes and called on Obama to make public the details of what he is proposing in the negotiations "so that both Republicans and Democrats can make well-informed decisions about something of this magnitude."

Asked about going public with details of entitlement reforms being discussed, White House Press Secretary Jay Carney told reporters that would run counter to the negotiating process and the principle that "nothing is agreed to until everything is agreed to."

At the heart of Obama's call for more tax revenue would be allowing tax cuts from the Bush presidency to expire at the end of 2012 for families making more than $250,000. His plan would keep the lower tax rates for Americans who earn less.

Obama noted earlier this week he is not looking to raise any taxes until 2013 or later. He claimed he has "bent over backward to work with the Republicans" and not force them to vote on any revenue hikes in the short term -- a politically toxic move for the GOP's conservative base.

In exchange, Obama said, he wants to ensure that the current progressive nature of the tax code is maintained, with higher-income Americans assessed higher tax rates.

For his part, Treasury Secretary Tim Geithner warned that time is running out. The secretary said he wants to see a deal to raise the debt limit and cut projected spending by the end of this week -- or next week at the latest -- so that Congress will have enough time to turn the deal into law.

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