|The compromise deal comes after weeks of negotiations between Republicans and Democrats [GALLO/GETTY]|
The US congress is set to vote on an 11th-hour agreement between Republicans, Democrats and the White House on a deal to raise the limit on US borrowing and prevent an unprecedented debt default.
Just days before a August 2 deadline to lift the US debt ceiling, the White House and both Republican and Democratic leaders in congress said the compromise would cut about $2.4tn from the deficit over the next 10 years.
US stock prices surged on opening on Monday following the news, but they quickly turned negative again over worries that there may not be enough support for the deal in the House of Representatives and after poor manufacturing data.
Now that congressional leaders have sealed a deal, both the senate and House are expected to vote on Monday night and in principle a bill could be on Obama’s desk by the end of the day.
While the senate is likely to give its approval, the agreement’s fate may be less certain in the House.
Al Jazeera’s Patty Culhane in Washington DC reported that members of the House had expressed displeasure with the proposal during speeches on the floor on Monday, but that it was unclear whether this would be reflected in their votes.
“[The deal] could still be rejected … nobody really knows. Usually, if you’ve been around Washington for a while you know that if the Speaker of the House, the Democrats and the Republicans in the Senate and the president sign off on a deal, well then it’s usually a done deal. But this is very different,” she said.
“This case, this debt ceiling, this Congress: we’ve seen a couple of examples where the leaders thought they had the votes, they really had to wrangle behind the scenes to get them.”
Joe Biden, the US vice-president, was due to hold closed-door meetings with senate and House Democrats in order to shore up support for the bill. Speaking ahead of those meetings, Biden said he was “confident [the bill] will pass”.
House minority leader Nancy Pelosi, a Democrat, has remained noncommittal on the deal.
“I look forward to reviewing the legislation with my caucus to see what level of support we can provide,” she said of the deal.
Mitch McConnell, the leader of the minority Republicans in the senate said on Monday that he was “optimistic” that the deal would be passed.
Harry Reid, the majority leader in the senate, indicated on Monday that the lack of widespread satisfaction with the deal was “typical for compromise legislation. Neither side got what they wanted but it’s the essence of compromise”.
Reid said that there were hopes that the bill could be put before the House on Monday evening, and that if this were the case, he would work towards having the senate vote on it on the same night.
Credit rating fears
If approved, the compromise would presumably preserve America’s sterling credit rating, reassure investors in financial markets across the globe and possibly reverse the losses that spread across Wall Street in recent days as the threat of a default grew.
Economist Stephen Barber explains why the US debt crisis could have an international impact
The White House on Monday declined to comment on how credit rating agencies would judge the debt deal.
The treasury department, meanwhile, said that it would seek to issue $331 billion in net debt in the July-September quarter, if the deal was approved.
After weeks of impasse and with the final outcome hinging on support from reluctant legislators, Obama pressured both sides to follow up on the accord reached behind closed doors.
“The leaders of both parties in both chambers have reached an agreement that will reduce the deficit and avoid default – a default that would have had a devastating effect on our economy,” Obama said at the White House.
“I want to urge members of both parties to do the right thing and support this deal with your votes over the next few days.”
Obama indicated that the deal was not an outcome that he would have “preferred”, but that it should be passed because it would “end the crisis that Washington imposed on the rest of America”.
The plan – which boosted global financial markets – involved a two-step process for reducing the US deficit.
The first phase calls for about $900bn in spending cuts over the next decade and the next $1.5tn in savings must be found by a special congressional committee. Congress must act by December 2011, under the deal.
Republicans had insisted on deep spending cuts before they would consider raising the $14.3tn limit on US borrowing, turning a normally routine legislative matter into a dangerous game of brinkmanship.
Resolution of the debt-ceiling impasse could ease the immediate crisis, which has threatened global economic
consequences, but broad repercussions will still be felt for years to come.
While the deal means the US is unlikely to default, it is far from certain whether the plan goes far enough in reducing the deficit to appease credit ratings agency S&P, which has threatened to strip America of its prized AAA rating.
Despite that, markets showed signs of relief after becoming unnerved in recent days.
The Japanese stock index rose 1.8 per cent, US stock futures built on earlier gains and the US dollar rose
modestly against the yen and the Swiss franc. Gold fell more than one per cent, indicating investors had begun to shift out of safe havens.
“For the rally to be durable, markets will need more than this down payment agreement,” Mohamed El-Erian, co-chief investment officer at PIMCO, the world’s biggest bond fund, said.
“They will look to a more coherent fiscal reform to emerge from the second step and, more generally, for additional measures to remove structural impediments to growth and jobs.”
Selling the deal
A key provision of the deal was originally conceived as part of a “fallback” plan in case all else failed.
It would grant Obama the authority – and the blame – to raise the debt ceiling in three steps while allowing
Republicans to avoid explicitly approving each increase.
Congress would get a chance to register their disapproval on two of these, but would not be able to block them unless they muster a two-thirds vote in both the House and the senate – an unlikely prospect.
Congressional leaders will now have to gauge whether they have the votes to pass the deal – which has sharp spending cuts and no new taxes – in the senate and the House.
In the House, the political calculus is complicated by the entrenched opposition of some members affiliated with the conservative Tea Party movement.
John Boehner, the House speaker, who will face opposition from those conservatives in his ranks, told Republicans he backed the accord but that it was not the “greatest deal in the world”.
A senior House Republican, Jack Kingston, predicted the deal would pass with broad Republican support, though significant Democratic votes will be needed to guarantee passage.