US leaders edge towards debt deal as clock ticks to default deadline

The first shards of optimism emerged yesterday that America's leaders could end their squabbling and put together a package to ensure the world's biggest economy avoids a first-ever default on its obligations.

While the deadline for action remains tomorrow, the opening of the markets after the weekend was also on negotiators' minds during the talks aimed at reassuring the world of the US's financial viability. The package would, crucially, provide the US the authority to raise the ceiling on its borrowing abilities in time for tomorrow, the day on which the US Treasury has said it would no longer be able to cover all of its outgoings with the money at its disposal. Just as importantly, however, it would at the same time enact an initial round of steep austerity cuts as the Republican camp has been demanding with more to come later.

"We are cautiously optimistic," said Senator Harry Reid, the Democrat majority leader. He emphasised, however, that past moments of optimism had been "stomped on" and everything could yet fall apart. While Senate leaders and the White House had a comprehensive package sketched out, it still faced a test in the House of Representatives before it can be signed by President Barack Obama.

An official close to the president said it might be possible to raise the debt ceiling by just enough to cover the next few days if Congress needs more time to get the deal finalised and approved.

It was a comment that reflected lingering anxiety over whether the compromise being hammered out would satisfy the Tea Party wing of the Republican majority in the House and their government-strangling agenda.

It will fall to John Boehner, the Speaker, to bring them into line when a vote is called but, as recent events have shown, party discipline is not a Tea Party priority. Not helping is the mood of antagonism that has engulfed Capitol Hill and all of Washington in the past several days. The struggle over the debt ceiling has been responsible for "an enmity that in my 37 years as a legislator I have never seen",said Senator Charles Schumer of New York.

Much of that bitterness has been centred on the lower chamber and the tensions that have blown up not just between Republicans and Democrats but also between the factions within the Republican Party, thanks to the Tea Party faction. The White House and the Democrat majority in the Senate appeared to have scored one major success in ensuring that the compromise package, assuming it survives, would extend the debt-ceiling significantly enough that the issue will not return before the end of next year and, crucially, will not emerge as a potentially damaging distraction for the president during his 2012 re-election effort.

There is, however, much about the putative package that will cause Mr Obama and the Democrats pain. For now, at least, they have utterly surrendered on their demand that there be at least some revenue-raising element to it in the form of higher taxes for wealthy earners and corporations. They have also ceded to the Republican demand that just as the debt ceiling is allowed to rise, so equal cuts in spending must take effect.

Also in the draft last night was a requirement that Congress move to amend the US Constitution to require the federal government to balance its budget. The inclusion of the so-called balanced budget amendment was a must-have for Tea Partiers. It will give liberals and most economists conniptions, however.

As a first step, the package foresees raising the debt ceiling by nearly $1 trillion (£610bn) – enough for the Treasury for the rest of year – while spending cuts of roughly the same order would be implemented. In the meantime, Congress would appoint a bipartisan committee that would identify a second round of spending cuts for next year.

Mitch McConnell, the leader of the Republican minority in the Senate, sounded pleased with what seemed to be taking shape. "What conservatives want to do is cut spending," he said. "We've come a long way. This agreement is likely to encompass up to $3 trillion is spending cuts."

The frantic weekend

(All Washington DC times)

Friday, 29 July

18.30 Republican-controlled House of Representatives passes bill to avert default, ignoring Senate's opposition

20.28 Senate rejects the same debt-limit bill, just two hours after House passes it.

Saturday, 30 July

15.15 The House rejects a debt-limit plan proposed by Senate Democratic leader Harry Reid.

15.24 Obama meets the Democratic leaders Harry Reid and Nancy Pelosi for an update on negotiations.

16.04 Republican leaders in Congress express confidence that the debt impasse will end soon.

17.00 Mr Reid counters that no deal is yet in place.

22.15 For the first time, Mr Reid expresses confidence that catastrophe will be averted and indicates that the deal will settle the debt-ceiling issue beyond the presidential election.

23.24 News agency AP reports "significant progress" towards a deal between the White House and Republicans.

Sunday, 31 July

0819 News networks begin reporting that a tentative agreement has come into view.

0920 Senate Republican leader Mitch McConnell tells CNN that deficit negotiations are "very close" to a $3 trillion deal to raise the federal debt limit.

11.30 The White House signals it would be open to raising the debt limit for a few extra days if lawmakers reach a deal and need time for it to clear Congress.

13.00 Attempt at a first vote to move the debt-ceiling package closer to reality fails in the Senate. Talks continue...