US debt deal clinched

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US debt deal clinched

Ending a perilous stalemate, US President Barack Obama has announced agreement with Republican congressional leaders on a compromise to avoid the nation's first-ever financial default.

The broadest outlines of the emerging plan would raise the federal debt limit in two stages by at least $US2.2 trillion, enough to tide the Treasury over until after the 2012 elections.

Big cuts in government spending would be phased in over a decade. The first step would take place immediately, raising the debt limit by nearly $US1 trillion and cutting spending by a slightly larger amount over a decade.

That would be followed by creation of a new congressional committee that would have until the end of November to recommend $US1.8 trillion or more in deficit cuts.

Done deal ... US President Barack Obama says he has reached agreement with the Republicans.

Done deal ... US President Barack Obama says he has reached agreement with the Republicans.Credit: Reuters

Congress must still approve the deal on raising the $US14.3 trillion debt ceiling by Tuesday US time (Wednesday AEST) to avoid a devastating government default.

"Is this the deal I would have preferred?" Mr Obama asked, answering his own question with one word: "No."

But he said: "Most importantly it will allow us to avoid default and end the crisis that Washington imposed on the rest of America. And it will allow us to lift the cloud of debt and uncertainty [that has hung above the United States for weeks]."

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Default "would have had a devastating effect on our economy," the President said in his televised address at the White House on Sunday night (Monday morning AEST).

News of the likely deal cheered investors, sending the Australian sharemarket up by about 2 per cent at one stage before some of the exuberance wore off. Still, the local market rose in value by about $22 billion for the day.

CMC Markets analyst Michael McCarthy said investors were relieved the US would avoid a default on its debts.

"Clearly the big issue for global markets at the moment is the US negotiations, and at the moment there is a lot of relief that a deal has been done. It's a good first step," he said.

The Australian dollar also rallied, jumping more than half a US cent today to about 110.50 US cents, not far off its post-float record of 110.80 US cents hit last week.

We're not done yet: 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

Deal struck

Republican House Speaker John Boehner telephoned Mr Obama mid-evening to say the agreement had been struck, officials said. Mr Boehner also told fellow Republicans he wants the House of Representatives to vote on the deal on Monday, US time.

"The Speaker wants us out of town by tomorrow [Monday, US time]. He wants this done," Republican House Representative Jack Kingston said.

The framework would raise the $US14.3 trillion debt ceiling through 2012, cut spending by about $US1 trillion and call for the enactment of a law shaving another $US1.5 trillion from long-term debt by 2021 - or institute punishing reductions across all government areas, including Medicare and defence programs, according to congressional officials.

No votes were expected in either house of Congress until Monday US time at the earliest, to give rank-and-file lawmakers time to review the package.

"I want to announce that 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," Mr Obama said in hastily made remarks at the White House.

"We're not done yet: 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," Mr Obama said, with time running short before the deadline.

Limit hit

The US government hit its debt limit on May 16 and has used spending and accounting adjustments, as well as higher-than-expected tax receipts, to continue operating normally - but can only do so until August 2.

Business and finance leaders have warned default would send crippling aftershocks through the fragile US economy, still wrestling with stubbornly high unemployment of 9.2 per cent in the wake of the 2008 global meltdown.

Democratic Senate Majority Leader Harry Reid endorsed the emerging accord between Republican leaders and the Obama administration even as negotiators were working out the final details.

Republican Senate Minority Leader Mitch McConnell told senators that the US would not default on its obligations.

Congressional leaders are sifting through the details of the agreement, preparing to sell the deal to sceptical Republicans and Democrats.

Mr Obama said the deal would establish a bipartisan committee of Congress to report back by November with a proposal to reduce the US deficit further.

Democratic House Minority Leader Nancy Pelosi said she was reserving judgment on the plan until she could see details and discuss them with fellow Democrats, some of whom were already voicing concern that the package calls for steep spending cuts with no tax increases to help shrink the deficit.

"We all may not be able to support it - or none of us may be able to support it," she told reporters at the Capitol.

Out of sight

Mr Boehner and Senator McConnell, the Republican leader, stayed out of sight as they hammered out the accord, as some in their ranks criticised the plan as doing too little to rein in the debt.

Earlier, Senator McConnell told reporters as he left the Senate chamber: "We're really, really close to an agreement, and we'll let you know when we get it."

He said Republicans and Mr Obama had made dramatic progress on the compromise this weekend.

Mr Boehner was to brief rank-and-file Republicans by conference call as aides worked to complete the plan and draft legislative language, Republican aides said.

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The US dollar rallied on the news, while the yen weakened against all 16 major counterparts as gains in stocks reduced demand for lower-yielding, safe-haven currencies.

Agencies, with BusinessDay

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