US debt crisis: deal ‘very close’ but key deadline could still be missed

Despite cautious optimism from both sides the US could still default on its debts, risking economic chaos around the world A last-gasp compromise began to take shape in Congress on Sunday night aimed at ending the US debt deadlock that has threatened to throw the US and world economy into chaos. But, with time fast running out, Congress may have left it too late to meet the Tuesday deadline set by the Treasury for raising the debt ceiling above its current $14.3tn limit. The US Treasury had said that if the ceiling was not lifted by Tuesday, America would no longer have the cash needed to pay all its bills and faced the prospect of defaulting for the first time in its history. The White House hinted on Sunday that the deadline could be extended for a few days to allow Congress to get legislation through. The Democratic leader in the Senate, Harry Reid, said he was “cautiously optimistic” of a deal, a view echoed by his Republican counterpart, Mitch McConnell. McConnell, interviewed on Sunday morning, said: “We are very close. We had a good day yesterday. Both the president and vice-president called me … and they understand we have to come together.” The White House and Congressional leaders were anxious to get a compromise deal under way, fearful that uncertainty could lead to huge market falls on Monday . Market experts warned that even if a deal was struck, the world’s largest economy was likely to be stripped of its triple A debt rating by Standard & Poor’s. The head of the world’s largest bond investor – Mohamed El-Erian of Pimco – told US broadcaster ABC: “Things that need to happen are not happening fast enough. If S&P sticks to what it said, it will downgrade.” Economists agreed. Julian Jessop, chief international economist at Capital Economics, said: “It looks like they will get a deal done to lift the debt ceiling but it looks like none of the numbers are going to reassure the debt rating agencies. I’m pretty sure America will lose its triple A rating.” Such a move is likely to prompt a big jump in the cost of borrowing for the US. In the first of a series of votes on Sunday, the Senate voted on a mainly technical issue to try to end debate on the subject, but the Republicans blocked it. Republicans in the Senate then went into a session of their own to discuss the details of the deal before voting on the package. The deal will raise the country’s $14.3tn debt ceiling by about $3tn. Raising the debt ceiling is normally a routine issue but the Republican members of Congress, especially a hard core allied to the Tea Party movement, have used it over the last month to hold the White House hostage. The Republicans received their reward on Sunday when they won concessions that could see the increase in the debt ceiling matched by an equivalent $3tn of cuts in the federal budget over the next decade. The Senate vote marks the start the end of a saga that has left Washington paralysed for weeks. But the Senate bill still has to go to the Republican-controlled House, which will be more problematic. The bill is likely to pass the House with the support of a combination of mainstream Republicans and Democrats. But there is a hard core of Republicans in the House, about 20-50, allied to the Tea Party movement, some of whom vowed on Sunday night to vote against it, and some Democrats who feel Obama has conceded too much. David Plouffe, a White House adviser, told ABC it was not clear if there would be enough House Republicans to get a deal through. The deal is mainly a victory for Republicans whose mission has been to cut America’s huge federal spending budget and undermine Barack Obama in his bid for re-election next year. Leftwingers in the Democratic party will be dismayed over the spending cuts and that Obama has failed to force the Republicans to agree to tax rises. The crisis has already hurt Obama, with a poll carried last week showing his approval ratings drop from 45% to 40%. But the Republicans may be hurt too by their association with the Tea Party movement. America’s financial reputation has suffered as well, particularly over the last week, and even though a debt ceiling rise is now on the cards, the country could still see its credit rating being downgraded. The deal emerged late on Saturday after fractious public exchanges earlier in the day between Republicans and Democrats that highlighted the gap between the two sides. The Democratic leader in the House, Nancy Pelosi, in a feisty speech on Saturday accused Republican Speaker John Boehner of having gone over to the “dark side” in courting hardcore Republicans allied to the Tea Party movement. But late on Saturday night, after a series of negotiations involving Obama, vice-president Joe Biden, Reid, McConnell, Boehner and Pelosi, they reached an agreement on the broad principles of a deal. The Senate deal could see the debt limit rise by $1tn this week and a further $1.8tn next year, though the White House refused to confirm the figures. US politics United States Republicans Democrats Tea Party movement US economy Economics Ewen MacAskill guardian.co.uk

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