Senate Edges Towards Deal to Avoid US Default

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The Age (Australia)

Senate Edges Towards Deal to Avoid US Default

by
Simon Mann

A demonstrator waves placards to make her feelings known in a protest outside the Capitol in Washington. (Photo: Reuters)

A PLAN being hatched by Senate leaders trying to break the deadlock over US debt negotiations is firming as America's best bet for avoiding a default on its $US14.3 trillion ($A13.5 trillion) borrowings by August 2.

The fallback deal is expected to come to the fore after Republicans score a moral victory in the House of Representatives as early as Tuesday Washington time (today Melbourne time), voting in favour of a rise in America's debt limit in return for spending cuts and a commitment to a balanced budget.

But the bill stands no chance of becoming law, with the Democrat-controlled Senate standing ready to reject it and President Barack Obama promising to veto it should it reach his desk. The so-called ''cut, cap and balance'' act would cut spending by $US111 billion next year and cap future outlays at 18 per cent of the nation's gross domestic output, compared with the current 24 per cent.

The bill would allow a rise in the debt ceiling large enough to carry the federal government beyond the 2012 elections, but only if Congress separately approves a balanced budget amendment to the Constitution and sends it to the states, where three-quarters must approve it for it to take effect.

Democrats described the cap on spending as draconian. But a House vote would allow conservative Republicans, particularly newcomers backed by the Tea Party, to satisfy their political base by nailing their colours to the bill's harsh anti-spending formula.

While White House press secretary Jay Carney mocked the bill as ''duck, dodge and dismantle'', the administration's Office of Management and Budget characterised its provisions as ''pursuing an empty political statement and unrealistic policy goals''.

America's debt limit must be raised by August 2 so that Washington can borrow enough money to pay investors holding US government securities, as well as to fund social security, welfare and other government payments.

The possibility of a default is rattling financial markets, although most analysts expect a deal in time to avoid a meltdown, which could, in turn, push the US back into recession.

But even if a default is avoided, ratings agencies have warned that failure to rein in the nation's $US1 trillion-plus annual deficits could yet trigger the loss of America's coveted AAA credit rating.

Senate leaders said the chamber would remain in session until a deal was clinched.

A plan put forward last week by Republican Mitch McConnell for a three-stage rise in the debt ceiling, to be matched by spending cuts proposed by the President, would provide the basis of a deal.

By Monday evening, two more components were being added: modest spending cuts and a joint party commission to find other ways to cut the deficit. But the plan contained plenty of wriggle room: Mr Obama's proposed cuts, for example, would not have to be acted on to guarantee a rise in the ceiling.

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