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Optimism over 'fiscal cliff' fix in US

President Barack Obama quipped in Thailand at the weekend that a monk's prayers there might help the US economy dodge the "fiscal cliff," but divine intervention is looking less and less necessary.

Days after Obama met at the White House with Democratic and Republican leaders to formally begin talks on avoiding steep automatic budget cuts and tax hikes, optimism has soared over a potential fix to a massive problem which if not resolved could send America tumbling back into recession.

After months of bitter feuding, senators and congressmen have expressed confidence over a deal that, in one form or another, would prevent $500 billion in tax increases and spending cuts from going into effect at the beginning of next year and begin to ease the nation's deficit woes.

US stock exchanges soared Monday, largely on hopes that politicians will get their act together and avoid a fiscal conflagration that will occur unless new legislation halts it.

While most lawmakers are steering clear of Capitol Hill this week on account of the Thanksgiving holiday, House Speaker John Boehner's staff met with White House officials on Monday on how the two sides might reach a deal and avoid the political train wreck of last year's failed grand bargain.

While there appears to be unanimous support for maintaining the Bush-era tax cuts for millions of middle-class households, Boehner's Republicans have long insisted on not raising taxes even on the wealthiest Americans -- a platform derided by Obama but embraced by Republican presidential nominee Mitt Romney.

With Romney crashing to defeat in the election two weeks ago, and Obama's hand strengthened with Democratic gains in both the House and Senate, some Republicans have acknowledged, like Boehner, that revenues are on the table.

Obama has insisted that any deal to avert the fiscal cliff would require tax rises paid for by the wealthiest two percent of Americans -- families making more than $250,000 per year.

The framework of a deal is uncertain, but the basics are starting to take shape, lawmakers and aides say.

One senior Democratic official said he did not want to presuppose what sort of deal -- whether a grand bargain by year-end or a phased-in compromise which addresses major decisions like tax-code changes, spending cuts and entitlement reform next year -- could be struck between the lawmakers and the White House.

"But the point here is that as you get closer to the cliff, it's been pretty clear that we can't afford to go over it," the official told AFP on condition of anonymity.

"The Republicans after the election have really come to realize that playing chicken with this economy is not a good political slogan."

There is a chance that a new grand bargain is resolved by year end, but some say the more likely resolution will be drawn out, beginning with a stop-gap measure that maintains the Bush-era tax breaks for 98 percent of Americans and repeals the automatic spending cuts to prevent the changes from kicking in on January 1. Deeper, more long-term reform would occur next year.

Senator Kent Conrad, the outgoing chairman of the Senate Budget Committee, said he envisioned a "$5 trillion package" over 10 years that encompasses raising revenues, cutting into discretionary spending and reforming key US entitlements such as Medicare and Social Security.

The first element is "a down payment in the range of $400 billion on the revenue side and on the spending side," Conrad told The Wall Street Journal.

"Number 2, a framework that sets out for the committees of jurisdiction how much money they're to save, how much money they're to raise and what the balance is between the two," he said, adding that such a deal might be worked out within six months.

A third part, would be a "fail safe" measure that kicks in if Congress is unable to reach agreement.

That recalls a similar enforcement action that was mandated in an August 2011 deal between Obama and Congress over raising the debt limit. That deal required them to identify an extra $1.2 trillion in savings by January 2013.

Should Congress fail -- as they have so far -- to work out a comprehensive solution before the deadline, the automatic cuts will kick in.

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