* Failure to raise debt will hurt economy, president says
* Central bank should decide on Corpbank by Oct 15: president
* Bulgaria to pay only guaranteed deposits if bank fails: president
* Moody's downgrades Corpbank bond
* Bulgaria's CDS rise to highest level since July 8
By Tsvetelia Tsolova
SOFIA, Aug 1 (Reuters) - Bulgaria's president appealed on Friday for authority to increase the country's budget deficit and raise new debt, as his interim government coped with the worst banking crisis since the 1990s.
Rosen Plevneliev said a failure to increase the deficit to 2.7 percent of GDP and raise up to 3.4 billion levs ($2.33 billion) in new debt would have a "dramatic" effect on the economy, destabilising the country.
Raising debt would help the government deal with Corporate Commercial Bank (Corpbank), which was hit by a run on deposits in June. The central bank has seized control of the lender and frozen its operations, pending an audit.
Plevneliev is due to appoint an interim administration on Wednesday to govern the European Union's poorest country until a snap election on Oct 5, following the resignation of the Socialist-led coalition last week.
Parliament's role could be key to the bank rescue and its approval is required to raise debt, but earlier in July lawmakers failed to agree on a rescue package and are at loggerheads over to what extent deposits and bondholders will be protected.
About 1.5 billion levs will be needed for Corpbank Plevneliev said. The central bank should decide whether to liquidate or stabilise the lender by Oct 15, he said.
The crisis has put renewed scrutiny on the investment climate in Bulgaria. The country's credit rating was downgraded by Standard & Poor's in June and has struggled to revive economic growth and foreign investment.
"If you do not approve the changes ... the state will be deliberately tripped over. The hands of the interim government will be tied. The only thing it would be able to do is to cut (spending), instead of stabilising the country," he said at a meeting with the leaders that was aired live on TV.
Bulgaria's five-year credit default swaps have risen two basis points to 130, their highest level since July 8, according to Markit.
Parliament had approved measures on Tuesday to widen the fiscal deficit to 2.7 percent from a planned target of 1.8 percent this year, to raise new debt and also to pump 200 million levs into state healthcare.
But the centre-right GERB party - tipped to win the October vote - has since backtracked, fearing it may lose support by siding with a former opponent, the junior partner of the outgoing government.
At a meeting with the president on Friday, the parties could only agree to increasing healthcare spending. The Socialists have so far refused to increase the budget deficit, or to allow the interim government to raise new debt except under strict conditions.
The central bank announced on Thursday that Corpbank would remain shut beyond the earlier planned date of its reopening - Sept 21 - and said it was extending the period of an independent audit until mid October.
"We wish to see the bank stabilised, but if the hole (in the capital) is too big, which is possible, there should be a liquidation," Plevneliev said.
If the bank is declared bankrupt, Bulgaria needs to start paying out guaranteed deposits of up to 100,000 euros, he said. , adding deposits above that limit would not be paid.
A failure to raise debt - which would also be used to pay workers at state-run construction projects and pay fines to Brussels in order to unfreeze EU aid programmes - would hurt an economy that grew just 1.2 percent in the last quarter, Plevneliev said.
He also urged MPs to allow the interim government to sign debt deals with institutions like the European Central Bank, the European Bank for Reconstruction and Development, the European Investment Bank and the International Monetary Fund, if needed.
The failure to reach a consensus on how to rescue Corpbank has raised the prospect of a default on a dollar bond issued by Bulgaria's fourth-largest lender that matures on Aug 8.
Ratings agency Moody's downgraded its rating on the bond to Ca from B3 on Thursday after it missed a July interest payment.
The prospect of a default has prompted some of the bondholders to prepare for possible legal action against the Bulgarian government, sources told Reuters.
$1 = 1.4573 Bulgarian Levs Additional reporting by Carolyn Cohn; Editing by Matthias Williams, Larry King