* Democrats try to blunt Republican advantage on debt limit
* Obama invokes troops, retirees as potential victims
* Debt limit a powerful but dangerous tool for Republicans
By David Lawder
WASHINGTON, Jan 15 (Reuters) - Congressional Republicans, frustrated by the failure of earlier efforts to get President Barack Obama to agree to spending cuts, suddenly find themselves in a fight to keep their grip on the one tool they thought would give them better leverage: Their threat to block an increase in the government's ability to borrow money next month.
That became clear on Monday as Obama used the last news conference of his first term for his most dire - and least wonky - portrayal yet of the woes that would befall the nation if the debt ceiling is not extended.
Rather than dwell on the impact of debt default on credit ratings that many people don't fully understand, Obama spoke instead of troops, retirees and air traffic controllers all being without their paychecks should Republicans make good on their threat.
"If congressional Republicans refuse to pay America's bills on time, Social Security checks and veterans' benefits will be delayed," Obama said.
"We might not be able to pay our troops, or honor our contracts with small business owners. Food inspectors, air traffic controllers, specialists who track down loose nuclear material wouldn't get their paychecks.
"....Markets could go haywire. Interest rates would spike for anybody who borrows money - every homeowner with a mortgage, every student with a college loan, every small business owner who wants to grow and hire."
Rather than try to explain how failing to raise the debt ceiling would impact borrowing, he compared it with eating "all you want" at a restaurant and then leaving "without paying the check."
The escalation (and simplification) of Obama's rhetoric is designed by his own acknowledgement to take the debt limit entirely out of play as a bargaining chip by making it too hot to handle and thus non-negotiable.
Once having uncoupled it from the ongoing debate about spending, he can move on to the next controversy. That would mean negotiations about automatic spending cuts postponed for two months in January's "fiscal cliff" deal and a less volatile debate at the end of March over continued funding of the government.
The United States scraped up against its $16.4 trillion debt ceiling on Dec. 31 and is now employing special measures to meet its financial obligations. The Treasury Department said those steps could be exhausted by mid-February. [ID: nL2N0AJDXD]
In response, Republicans are arguing that use of the debt ceiling as a bargaining tool is routine and that the consequences of refusing to raise it manageable.
Rather than prompting a default and an economic calamity decried by Democrats, these lawmakers say it will merely lead to a temporary shutdown of some government departments and programs - one that could jolt Obama into a meaningful deficit reduction deal.
Senator Jeff Sessions of Alabama, the top Republican on the Senate Budget Committee, said in an interview with Reuters last week that it would lead to "temporary disruptions," that would be blamed on Obama for refusing to bring down spending.
"Republicans should use, will have to use, for the sake of the country, any leverage they have to accomplish that goal. And the debt ceiling is one of the things that can be effective in helping to reduce spending."
To back up their case that the debt ceiling is a routine bargaining device, senate Republican aides sent the media a note showing numerous cases of spending restraint going back to the 1980s that were attached to debt limit increases.
But lists compiled from the archives of Congress tend not to resonate with the public. And talk of shutting down the government - let alone actually going through with it - has proven counterproductive, even ruinous, to Republicans in the past.
After the government shutdown of 1995, polls showed that the public overwhelmingly blamed Republicans rather than President Bill Clinton for the disruption, a response which helped Clinton battle his way to a second term in office in 1996.
HEARTS AND MINDS
Some say that the current back and forth is still just early jousting over the issue.
"We're still in the phase where you try to win the hearts and minds of voters before there's any negotiations," said Greg Valliere, chief political strategist at Potomac Research Group, which advises institutional investors on Washington politics. "Both sides are just digging in their heels."
Obama and congressional Democrats are hoping the U.S. business community will help them win the debt limit argument by pressuring Republicans to promptly approve an increase in borrowing authority.
In recent days, U.S. Chamber of Commerce officials repeatedly have warned that leading the government to a default on its debt could result in serious economic disruptions.
Meanwhile, John Engler, the head of the Business Roundtable, a trade group of company chief executives, has recently called for a five-year increase in the debt limit, divorcing it from the spending debate.
With an inauguration address next Monday and the State of the Union address in February, Obama can be expected to keep hammering away on this theme.
Republicans want deep cuts to the Medicare and Medicaid health care programs and savings from the Social Security retirement program. Democrats are resisting these, and will likely only offer modest savings by adjusting inflation assumptions.
Some, though, do caution that while Obama may make headway in the public relations war, his approach could backfire.
"Obama blasting Congressional Republicans has this perverse flip side of only strengthening their resolve," said Chris Krueger, a political analyst at the financial services firm Guggenheim Partners in Washington. (Additional reporting by Richard Cowan and Rachelle Younglai; Editing by Fred Barbash, Martin Howell and Jim Loney)