Crisis far from over as Congress votes on deal to avoid US default

Sunday’s bitterly fought deal, which would raise its existing $14.3 trillion (£8.7 trillion) debt ceiling, came after weeks of open partisan warfare.

President Obama said the plan cuts domestic spending to levels not seen in more than 50 years.

But while it was widely expected the plan would pass, given that it was crafted to thread the needle between the philosophically opposite ends of the political spectrum, there were no guarantees last night.

The deal needs to pass both houses of Congress to become law and there are elements of both parties expected to oppose it.

Today is the deadline to avoid a US default on payments to investors in Treasury bonds, recipients of Social Security pension cheques, those relying on military veterans’ benefits and businesses that do work for the government.

The deal aims to prevent a downgrade of America’s credit rating, and news of the agreement buoyed global investors as world stock markets jumped.

A stock market rally triggered by news of a last-minute deal to raise the US borrowing limit was short lived as depressed construction and manufacturing figures highlighted the broader weak economic climate and sent the FTSE 100 Index and Wall Street’s Dow Jones Industrial Average into the red.

In addition, a question mark remains over the security of the country’s AAA credit rating – which some analysts said is now under threat of a downgrade.

The House of Representatives began voting on the debt plan last night, while the Senate is not likely to vote until today.

Shortly after Senate Majority Leader Harry Reid and his Republican counterpart, minority leader Mitch McConnell, endorsed the plan on the Senate floor on Sunday night, Mr Obama went to the White House Press room to add his support for the deal.

It meets one of his key demands, raising borrowing power sufficiently to keep the divisive issue from returning to the national agenda until after the 2012 election. But it does not include any tax increases that he had pressed hard to include.

House Speaker John Boehner said the deal was a good one that met the demands of all Republicans.

While Mr Obama said important votes remained to be taken leaders of both parties in both houses of Congress agreed to a plan that would initially cut about a trillion dollars from US spending, “the lowest level of domestic spending since Dwight Eisenhower was president” in the 1950s.

Mr Obama conceded that the deal was not the one he would have preferred, but called it a “serious downpayment” on the US deficit.

He added: “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 doubt and uncertainty” that has hung above the United States for weeks.

Mr Obama, along with many economists and financial experts, predicted global chaos and plunging stock markets had no deal been reached by the deadline.

House Democratic Leader Nancy Pelosi was publicly noncommittal. “I look forward to reviewing the legislation with my caucus to see what level of support we can provide,” she said.

The broadest outlines of the emerging plan, a deal that involved deep negotiations between Mr McConnell and vice president Joe Biden, would raise the federal debt limit in two stages, enough to tide the Treasury over until after the 2012 elections.