ANALYSIS-Stop-gap fix most likely outcome of US 'fiscal cliff' talks

* Hopes for "grand bargain" have faded

* Obama sticks to demand for tax hikes on wealthy

* Republicans hold out for deeper spending cuts

WASHINGTON, Dec 22 (Reuters) - The "fiscal cliff" deadline

is days away and the U.S. Congress and President Barack Obama

have left town for Christmas.

But even if they were still here, it wouldn't have mattered,

according to Steny Hoyer, the second-ranking Democrat in the

House of Representatives. He says they were going nowhere to

resolving the disagreement over how to fix the nation's fiscal

problems.

Last month's dreams of a "grand bargain" of tax hikes and

spending cuts seem long gone. They had been reduced to more

modest bargains in mid-December, and as 2013 approaches, are on

the verge of relegation to a "stop-gap measure," at best the

sort of temporary fix that Congress undertook in 2011.

A stop-gap that puts everything off for a while but resolves

nothing is now the most promising alternative, if there is to be

one, to the across-the-board tax hikes and spending cuts

described as a "fiscal cliff" because they threaten to send the

U.S. economy plunging into another recession.

It is also the way fiscal showdowns have ended in Washington

in recent years.

Such a fix, at best, would delay the spending cuts and tax

hikes further into 2013 as well as work to address in a

long-term way a government budget that has generated deficits

exceeding $1 trillion in each of the last four years. Even

worse, it would set up a huge fight in January and February over

raising the U.S. debt ceiling, which controls the amount of

money the federal government can borrow.

Dysfunction in Washington was specifically cited as one of

the reasons rating agency Standard & Poor's cut the U.S. debt

rating to AA-plus after a battle over the debt ceiling in 2011.

That alone - not to mention going over the cliff - could lead to

another rating cut.

At worst, the new year could start with a full-fledged jump

off the 'cliff,' with an understanding, communicated to

financial markets, that Congress and the White House would come

back and try again for a solution.

Given the apparent deadlock, some congressional aides this

week said that Washington needed to begin telegraphing to Wall

Street that markets should not panic if a "fiscal cliff" deal is

not struck in December.

The goal, one aide said on condition of anonymity, is to

avoid starting 2013 with a steep stock market drop like the one

the U.S. suffered in 2008, when the country's financial industry

was falling apart and Congress was divided over what to do.

On Friday, Obama acknowledged that only small steps might be

possible with so little time remaining.

Those, the Democratic president said, would consist of

extending benefits for the long-term unemployed and keeping

income tax rates low for 98 percent of Americans - meaning

raising taxes on households with net incomes above $250,000 a

year but not for those earning less.

He held out the possibility of something "comprehensive," as

he put it, but it had a hollow ring at the close of a work week

that saw House Speaker John Boehner step back from negotiations

and pursue a partisan plan that even some of his fellow

Republicans could not stomach.

MARKET PRESSURE

The steps that Obama outlined were immediately rejected by

Republicans, who have given ground on their previous steadfast

opposition to any tax hikes but are still demanding that the

White House agree to more substantial spending cuts.

"The president has failed to offer any solution that passes

the test of balance," declared Boehner spokesman Brendan Buck,

minutes after the end of Obama's statement on Friday.

On Saturday, a spokesman for Senate Republican leader Mitch

McConnell was similarly dismissive, noting Obama's call had

neither bipartisan support nor spending cuts to ride along with

tax increases.

McConnell, on Friday, suggested bringing up a House-passed

bill that extends current tax rates for all Americans, including

the top earners, and then pushes for comprehensive tax reform

next year that theoretically could raise new revenues to help

cut deficits.

But Obama has promised repeatedly to veto any extension of

the expiring Bush-era tax cuts that fail to hike rates for the

wealthy.

And Democrats, who control the Senate, have dismissed the

McConnell idea, arguing that Obama ran his successful 2012

re-election campaign on a promise of forcing the wealthy to bear

more of the burden of deficit reduction.

Democratic aides in Congress think their own bill

implementing Obama's $250,000 income threshold, which passed the

100-member Senate in July with 51 votes, could breeze through

this month, or next year after the "fiscal cliff" is breached.

The prospect of a breach is being discussed far more

seriously now, and not just as a bluff or to set up the other

side for blame.

"I think we're going to go over the cliff," said Republican

Representative Patrick Tiberi of Ohio. "I don't see something

getting done."

In an MSNBC interview Friday, Hoyer, a 31-year veteran of

Congress from Maryland, said it wouldn't matter if everyone was

in Washington instead of on holiday.

"Frankly, we've been in town for four weeks and members

haven`t been doing much," he said, calling it "one of the least

productive times that I've been in Congress."

Even Obama speaks of "a mismatch" between how people are

thinking about the looming tax hikes and spending cuts "outside

of this town and how folks are operating here. And we've just

got to get that aligned," he said in his statement.

ITG Investment Research Chief Economist Steve Blitz on

Saturday said sliding the "fiscal cliff" negotiations into the

new year was not a huge deal. "I think markets will pressure for

a deal in January," he said.

The "pressure" could be in the form of a significant stock

market drop, which would hit workers' retirement plans, threaten

to deter consumer and business spending, and possibly rattle

other countries' economies at a time when the global economy is

far from robust.

(Additional reporting by Rachelle Younglai; Editing by Martin

Howell and Paul Simao)

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