US debt crisis: talks to avoid default make 'significant progress'

Negotiations to raise the US debt ceiling and avert the country's first ever default continued through the night on Saturday as Republicans and Democrats tried to reach a deal before markets open on Monday. Photograph: Alex Wong/Getty Images

The White House and Republican leaders in Congress have made significant progress toward a deal to raise the US debt ceiling and avert a potentially catastrophic default, according to officials familiar with the talks.

Under a plan negotiated late on Saturday night, the ceiling would be raised in two steps by about $2.4tn (?1.5tn) and spending would be cut by a slightly larger amount, the officials said. The first stage – to raise the ceiling by about $1tn – would take place immediately and the second later in the year.

Congress would be required to vote on a balanced budget amendment to the Constitution, but none of the debt limit increase would be contingent on its approval.

President Barack Obama is seeking legislation to raise the government's $14.3tn debt limit by enough to tide the US treasury over until after the 2012 elections. He has threatened to veto any proposals that might lead to a recurrence of the current crisis next year but has agreed to Republican demands that deficits be cut – without tax increases – in exchange for authorising additional US borrowing.

Without a compromise in place by Tuesday, administration officials say the treasury will run out of funds to pay the nation's bills.

The subsequent default, which would be the first in US history, could prove catastrophic for the US economy by causing interest rates to rise and financial markets to sink, and sending shockwaves around the world. With financial markets closed for the weekend, the parties to the negotiations had a little breathing space, but not much. Asian markets open for the new working week late Sunday afternoon Washington time.

"There is very little time," Obama said in his weekly radio and internet address on Saturday. He called for an end to political gamesmanship, saying: "The time for compromise on behalf of the American people is now."

One official commenting on the late night negotiations said the two sides had settled on general concepts, but that there were numerous details to be worked out – and no assurance of a final agreement.

"There are many elements to be finalised," Harry Reid, the Democratic majority leader in the Senate said. "There is still a distance to go."

Still, word of significant progress after weeks of stalemate offered the strongest indication yet that a default might be averted.

Mitch McConnell, the Republican leader in the Senate, said at a joint news conference with the House speaker John Boehner that he was confident a deal could be reached "in the very near future".

After a meeting at the White House with Obama and the House Democratic leader Nancy Pelosi, Reid initially disagreed with that optimistic assessment.

Past increases in the US debt ceiling have been routine, but Republicans, citing the giant US deficit, have demanded huge spending cuts as a condition for approving the increase this time.

After weeks of intense partisanship, there was renewed talk of compromise as both the House and Senate convened for extraordinary Saturday sessions.

McConnell and Boehner held their news conference shortly after the House of Representatives had rejected a Senate Democratic bill drafted by Reid to raise the government's debt limit by $2.4tn and cut spending by $2.2tn.

The House vote was 246-173, mostly along party lines and after a bitter debate. The vote was unusual in that Republicans lined up to kill Reid's legislation before it had even cleared the Senate. It was orchestrated as political payback because late on Friday Reid had engineered the demise of Republican proposals hours after it they were passed in the House.

Before the House vote, Republicans said Reid's proposals were full of gimmicks and would make unacceptable reductions in defence spending.

Pelosi said Boehner had chosen "to go to the dark side" when he changed his own legislation to satisfy the Tea Party movement and other critics, who insist taxes must not be raised to cut into federal deficits, even for the wealthiest US companies and individuals.

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