Cautious optimism over US debt deal prospects

US Senate majority leader Harry Reid says there is still “a distance to go” before a deal is reached on raising the country’s $14.3tr debt ceiling.

“There are many elements to be finalised,” he warned. “There is still a distance to go.”

Mitch McConnell, Senator Reid’s Republican counterpart in the Senate, expressed cautious optimism about prospects for a deal, stating that there was “a level of seriousness, with the right people at the table”.

President Obama is seeking legislation to raise the US Government’s $14.3tr debt limit by enough to tide the Treasury over until after the 2012 elections.

He has threatened to veto any legislation that would allow a recurrence of the current crisis next year, but has agreed to Republican demands that deficits be cut – without tax increases – in exchange for additional US borrowing authority.

Under the proposals currently on the table, Congress would agree to raise the debt ceiling by between $2.4tr and $2.6tr, and make equal spending cuts – $1tr of which would be agreed now.

There are many elements to be finalised and there is still a distance to go. Harry Reid, Senate majority leader

A special Congress-appointed committee would recommend a second instalment of savings of about $1.8tr. Congressional leaders are aiming to finish that work by the end of 2011.

On Friday evening a Republican bill to boost the US debt limit by $900m was rejected by the Democratic-led Senate.

Earlier in the day President Obama had expressed confidence that both parties could break the debt deadlock. “We’re in rough agreement about how much spending can be cut responsibly,” he said.

If no agreement is reached by Tuesday 2 August, automatic cuts will be triggered, including reductions in military spending and cost savings to the Medicare health programme for the elderly.

Any default could prove catastrophic for the US economy by causing interest rates to rise and financial markets to sink.