US deficit deal - or default

The US Congress has struggled to hammer out a deficit deal and assure investors, before Asian markets open today, that America can avert a catastrophic default and hold onto its prized credit rating.

Congressional staff planned to work through the night after President Barack Obama told legislators at an emergency White House meeting that they must find a way to lift the $14.3-trillion limit on US government borrowing so that the world's biggest economy will be able to pay its bills after next year's presidential election.

Acrimony over that timetable flared again late on Saturday on Capitol Hill, adding to the difficulties of negotiators deadlocked for weeks on the role of tax in deficit cutting.

An aide to Republican leaders said they were working on a 10-year plan. It was not clear if this made provision for additional tax revenue as well as cuts in government spending, as Obama has demanded.

Republican leaders wanted "to show progress" by 4pm yesterday, before the financial markets in Asia began trading, and have legislation to unveil today.

"Congressional leaders are working in good faith with the goal of having something to present to their members on Monday," another Republican aide said.

The US government will run out of money with which to service its debt on August 2 if Congress does not allow extra borrowing. Republicans insist that the White House agree to deep spending cuts for long-term deficit reduction before they will approve an increase in America's debt burden.

Negotiations have whipsawed for weeks, eventually hitting a brick wall on the divisive issue of tax.

A Democratic aide said Republicans were pushing a package that raised the debt limit and cut spending in two steps, whereas Democrats want a single deal to cover borrowing next year.

Michael Steel, a spokesman for House of Representatives speaker John Boehner, the top Republican in Congress, said that "a two-step process is inevitable".

Disagreement on that issue prompted Senate Democratic leader Harry Reid to reiterate his disappointment with the process, saying Republican "intransigence" was "pushing us to the brink of a default".

A frantic drive towards a deal at the weekend began after closed-door talks between Obama and Boehner collapsed on Friday.

Those talks broke down as Republican leaders balked at a White House plan to raise revenue by $3.5-trillion to $4-trillion over 10 years, complaining that it contained $400-billion more in additional tax revenue than they could stomach.

Obama, angry at the collapse of negotiations, chided Republicans and warned that time had run out for lifting the debt limit. The White House kept up the pressure on Saturday, urging Congress not to play "reckless political games" and warning against stop-gap measures.

Treasury Secretary Timothy Geithner said yesterday that it was unthinkable for the US not to meet its debt obligations. Geithner said it was critical that Congress approve a new debt ceiling to get the country into 2013, past the presidential election in November next year.

"The most important thing is that we remove this threat of default from the country for the next 18 months," Geithner said.

"The leaders know that they need to agree on something that will pass the House and the Senate, and that the president can accept."

Rating agencies say they will cut the US triple-A credit rating if it fails to meet debt payments. Even if the US does not default, its rating will be under pressure if Congress fails to tackle long-term deficit reduction.

US banks and businesses are making contingency plans for a debt default that would drive up interest rates, sink the dollar and ripple destructively through world economies.