NewsBreakingOnline

Frenzied efforts to avoid ‘economic disaster’ as parties wrangle over formula to raise debt ceiling and cut spending The frenzied legislative manoeuvring to avert a crippling US debt default is continuing as Tuesday’s deadline to raise the country’s debt ceiling looms and Congress remains split down party lines. Late on Friday night the Republican-controlled House finally approved a bill to raise the debt ceiling in return for billions of dollars in spending cuts, but the Democratic Senate quickly rejected it. The back-to-back votes broke weeks of political inertia in efforts to lift the $14.3tn (£8.7tn) US debt limit by Tuesday, after which the world’s largest economy will be unable to pay all of its bills. The Democratic Senate leader, Harry Reid, ceded some ground when he revised his own deficit-reduction proposal to incorporate parts of a “back-up plan” first proposed by the Senate’s top Republican, Mitch McConnell. Reid is seeking a vote on the new proposal on Saturday. “Unless there is a compromise or [Republicans] accept my bill we’re headed for economic disaster,” Reid said. The new version would essentially give Barack Obama the authority – and the blame – for raising the debt ceiling in three stages to cover US borrowing needs through the 2012 elections when he is running for a second term. Obama and the Democrats had hoped to avoid multiple votes before the election. Speaking after dismal figures for US growth increased the pressure on politicians to prevent a fresh meltdown in global markets, Obama said: “I am confident we can solve this problem. I am confident we will solve this problem. “For all the intrigue and all the drama that’s taking place on Capitol Hill right now I’m confident that common sense and cooler heads will prevail.” But Congress remained in disarray for much of Friday with the Republican leader in the House, John Boehner, in a dangerous mood after failing to quell a humiliating revolt by the Tea Party wing. Boehner scheduled a vote on Thursday on a Republican bill to raise the debt ceiling and cut spending, but hardcore conservatives refused to back it and the vote had to be temporarily abandoned. The bill was substantially rewritten to meet conservative rebels’ demands. The febrile mood in Washington was matched on Wall Street and in the City of London, where news that the US grew at an annual rate of just 1.3% in the three months to June prompted renewed concern that the world’s biggest economy could lapse back into recession if ratings agencies downgrade its debt. Speculation that the Federal Reserve might need to embark on a third round of quantitative easing – the creation of electronic money – intensified after revisions to past figures for US gross domestic product showed the recession was deeper than originally believed and the subsequent recovery weaker. America’s peak-to-trough drop in output between 2007 and 2009 is now put at 5.1% rather than the 4.1% originally estimated. With the International Monetary Fund warning the US that a continued impasse risks reigniting Europe’s debt crisis, bond yields in Italy and Spain rose. The interest rate on 10-year Italian bonds rose to 5.89%, while that for Spain – where the government called a general election – climbed to 6.09%. Shares in London closed 1% lower, a drop of 58.02 at 5815.19, while the Dow Jones industrial average closed down 96.87 points at 12,143.24, completing a week of daily falls. Sources close to George Osborne, the British chancellor, said the new figures from the US showed that the American and British experience during and after the global downturn had been similar, weakening the argument for the coalition to revisit its tough austerity plans. If the US does not raise its debt ceiling by 2 August it risks being unable to continue borrowing and pay its bills. Obama has said that default is not an option so the US treasury will prioritise keeping up interest payments, which could mean cuts elsewhere. The president reiterated that the victims could be people expecting federal cheques for welfare, and military veterans and government contractors awaiting payments. “This is not a situation where the two parties are miles apart,” Obama said. “There are a lot of crises in the world that we can’t always predict or avoid: hurricanes, earthquakes, tornadoes, terrorist attacks. This isn’t one of those crises. The power to solve this is in our hands.” US politics US economy Economics United States Democrats Republicans Ewen MacAskill guardian.co.uk