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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US debt crisis: Obama warns of 'tax rise for all' if deal cannot be done

US President Barack Obama during a press conference on the debt ceiling in which he said Republican proposals for a budget deal without tax increases were not credible. Photograph: Mandel Ngan/AFP/Getty Images

Barack Obama has warned that the US is "running out of time" to raise the limit on US government borrowing and that failure to do so will lead in effect to a tax increase for all Americans, because a downgrade of the country's credit rating would cause an interest rate rise.

The president's warning was reinforced by a threat from the ratings agency Standard & Poor's to strip the US of its AAA standing if no long-term political deal is reached to tackle government spending and debt.

As Obama and Republican leaders in Congress continued to wrangle over the terms for approving an increase in the US's $14.3 trillion (?8.9tn) debt ceiling by the 2 August deadline – with Republicans rejecting Obama's demand that tax increases for the wealthy accompany sharp budget cuts – the president warned ordinary Americans of the seriousness of the situation.

"This is not some abstract issue. These are obligations that the United States has taken on in the past. The Congress has run up the credit card and we now have an obligation to pay our bills. If we do not it could have a whole set of adverse consequences. We could end up with a situation, for example, where interest rates rise for everybody all throughout the country, effectively a tax increase on everybody," he said.

But Obama also told a White House press conference that while the situation was serious, it could be resolved. "We don't have to do anything radical to solve this problem. Contrary to what some folks say, we're not Greece, we're not Portugal.

"It turns out that our problem is we cut taxes without paying for them over the last decade ... We fought two wars. We didn't pay for them. We had a bad recession that required a recovery act and stimulus spending."

S&P, which follows Moody's in warning of a possible downgrading of the US's top credit rating, put America on negative watch on Thursday and said there was "at least a one-in-two likelihood" that it could downgrade its debt "by one or more notches ... if we conclude that Congress and the administration have not achieved a credible solution to the rising US government debt burden and are not likely to achieve one in the foreseeable future".

Obama said that political leaders "should not even be this close to a deadline on this issue", but he stood firm in his opposition to Republican plans for $2.4tn in immediate spending cuts. The president said to achieve that level of savings without added tax revenues would require the "gutting" of social programmes that he could not support. He said that when ordinary Americans are asked to contribute more to retirement and healthcare programmes, then "millionaires and billionaires can afford to do a bit more".

Republican leaders in the US Senate appeared to be edging closer to an emergency deal with Democrats that would permit the president to raise the debt ceiling unilaterally, but there was continued opposition from fiscal conservatives in the House of Representatives who view such an arrangement as a victory for the White House. Obama said that the Republicans had "boxed themselves in" with election commitments.

The Republican leadership in the House of Representatives said it won control of the lower house of Congress in last November's election with a mandate to sharply cut government spending without any increase in taxes.

The Tea Party movement and fiscal conservatives intend to hold newly elected House members to that commitment, and warn that any deal with the president that does not include deep cuts or permits tax increases will be viewed as a betrayal.

Obama described any temporary solution that did not tackle long-term spending problems as the least attractive option. "We have a unique opportunity to do something big. We have a chance to stabilise America's finances for a decade, for 15 years or 20 years, if we're willing to seize the moment," he said.

John Chambers, chairman of S&P's sovereign ratings committee, also warned that an interim solution of the kind under discussion in the Senate would not be good enough and that Washington must tackle the long-term debt issue. "If you get a small agreement, that will lead to a downgrade," he told Reuters.

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