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US lawmakers were close to a last-gasp $3tn deal yesterday to raise the US borrowing limit and assure jittery financial markets that the US will avoid a potentially catastrophic default.
The tantalising possibility of an agreement raised hopes that a weeks-long partisan brawl over cutting the US deficit might be staggering to a cliffhanger close. There are just two days left to lift the debt ceiling, which caps how much money the US can borrow to pay its bills.
“We’re really, really close to an agreement,” said Mitch McConnell, the Senate Republican leader who is playing a key role in the negotiations on a plan to reduce the deficit and permit a vote to raise the debt ceiling.
Democrats were more cautious of the deal that Republicans said would cut deficits by up to $3tn over a decade. It would force Democrats to stomach deep spending cuts without the tax increases they wanted.
“We’re not there yet,” Senate Majority Leader Harry Reid said.
David Plouffe, a senior adviser to President Barack Obama, said there was general agreement on a plan that would cut the US deficit over 10 years in two stages: roughly $1tn up front and the rest based on the recommendation of a joint bipartisan committee.
The proposed $3tn in savings may calm financial markets but it appears insufficient to avoid a downgrade of America’s top-notch AAA rating by Standard & Poor’s. The agency last week reiterated that $4tn in deficit-reduction measures would be “a good downpayment” to show that Washington was putting the country’s finances in order.
“It’s really unclear whether a downgrade will be avoided as a result of this deal,” said Kathy Lien, director of currency research at GFT, New York.
British and Japanese officials warned of disastrous consequences for the global economy if the last-ditch talks among lawmakers in Washington failed to agree on raising the US borrowing limit and averting a debt default.
Governments across the world fear that because of the key role of the US dollar in global banking and trading systems, there could be severe instability when Asian financial markets reopen today if a US debt deal is not in sight by then.
Even if the two sides reach a deal, it still has a long way to go. Backers of a deal will have to tread a careful path in both the Democratic-led Senate and the Republican-held House of Representatives to get sufficient support for passage.
House Speaker John Boehner, the top US Republican, told House Republicans in an e-mail the talks were moving in the right direction “but serious issues remain.” Boehner faces pressure to placate conservative Tea party movement-aligned lawmakers in his caucus.
With a bipartisan deal close, a vote failed in the Senate on a Democratic alternative plan pushed by Reid. The defeat of the plan was yet another procedural step to clear the way for a deal that could attract support from both parties.
The emerging deal includes a two-step process to cut the deficit about $2.8tn over a decade.
Lawmakers have already largely agreed on caps to annual discretionary spending over 10 years. Officials from both parties say that would save $1tn, while the nonpartisan Congressional Budget Office puts the figure at $750bn.
Under the emerging deal described by congressional aides, a further $1.8tn would be recommended by a special committee appointed by Congress and automatic measures would implement the planned cuts if Congress failed to vote on them.
The committee would make its recommendations by late November.
The key sticking point in the negotiations is what sort of mechanism should be in place to ensure that Congress will agree to further budget savings after the committee makes its recommendations.
The deal seemed to answer key demands of both sides. It would have no tax increases as Republican wanted, and it would extend the debt ceiling through 2012 as Obama had insisted.
But by relying solely on spending cuts, Obama and his Democrats were likely to face questions about whether they ceded too much ground to Republicans and how they would protect popular but expensive social programs from the knife.
“There is a lot of unease,” said Senator Carl Levin, a Democrat.
The fight has laid bare the deep political divide in Washington and done nothing to improve the images of Obama, his Democrats and their Republican adversaries as they look to re-election battles in 2012.
While lawmakers on Capitol Hill worked on outlines of a compromise, Treasury officials made contingency plans on how the government would pay its bills if tomorrow’s deadline is missed.
“There are no good options. They are all very, very dire,” White House economic adviser Gene Sperling told Fox News Sunday.