• President Obama pins hopes on Senate leaders
• Spain calls snap general election
• Italian bond yields hit 5.89%
29 July, 2011
Barack Obama cleared his diary for the weekend last night to try to find a deal on the US debt crisis as Congress prepared to stay in session ready to vote on any last-gasp compromise.
Speaking after dismal figures for US growth increased the pressure on lawmakers to prevent a fresh meltdown in global markets, Obama said: "I am confident we can solve this problem. I am confident we will solve this problem.
"For all the intrigue and all the drama that's taking place on Capitol Hill right now, I'm confident that common sense and cooler heads will prevail."
But Congress remained in disarray Friday with the Republican leader in the House, John Boehner, wounded and in a dangerous mood after failing to quell a humiliating revolt by the Tea Party wing of the party. Boehner scheduled a vote on Thursday on a Republican bill to raise the debt ceiling and cut spending, but hard-core conservatives refused to back it and the vote had to be temporarily abandoned.
The febrile mood in Washington was matched on Wall Street and the City, where news that the US grew at an annual rate of just 1.3% in the three months to June prompted renewed concern that the world's biggest economy could lapse back into recession should it have its credit worthiness downgraded by the ratings agencies.
Speculation that the Federal Reserve might need to embark on a third round of quantitative easing – the creation of electronic money – intensified after revisions to past figures for US gross domestic product showed the recession was deeper than originally believed and the subsequent recovery weaker. America's peak-to-trough drop in output between 2007 and 2009 is now put at 5.1% rather than the 4.1% originally estimated.
With the International Monetary Fund warning the US that a continued impasse risks reigniting Europe's debt crisis, bond yields in Italy and Spain rose. The interest rate on 10-year Italian bonds rose to 5.89%, while that for Spain – where the government called a general election – climbed to 6.09%.
Shares in London closed down 1% lower, a drop of 58.02 at 5815.19, while the Dow Jones industrial average was on course to complete a week of daily falls with a loss of 60 points by lunchtime in New York.
Sources close to George Osborne said the new figures from the US showed that the American and British experience during and after the global downturn had been similar, weakening the argument for the coalition government to revisit its tough austerity plans.
Obama used the growth figures to urge Congress to come to a compromise on raising the US debt ceiling from $14.3tn (£8.7tn) by Tuesday's deadline. The White House is pinning its hopes for a deal on the Senate, where Obama hopes the Democratic leader Harry Reid and his Republican counterpart Mitch McConnell, a mainstream conservative, can reach a deal.
Obama, in a short statement at the White House, said there were multiple ways to resolve the debt stand-off by the Tuesday deadline.
If the US does not raise its debt ceiling by 2 August, it risks being unable to continue borrowing and unable to pay its bills. Obama has said that default is not an option so the US treasury would prioritise keeping up interest payments, which could mean cuts elsewhere. The president reiterated that the victims could be people expecting federal cheques for welfare, and payments to military veterans and government contractors.
"This is not a situation where the two parties are miles apart," Obama said. He added: "There are a lot of crises in the world that we can't always predict or avoid: hurricanes, earthquakes, tornadoes, terrorist attacks. This isn't one of those crises. The power to solve this is in our hands."
One scenario would be for the Senate to pass a compromise bill over the weekend that would raise the debt ceiling until the end of next year, after the White House election, and make deep cuts in spending. It could then be passed to the House for a vote in the hope that a combination of mainstream Republicans and Democrats would get it through. Tea Party Republicans could vote against, able to return to their districts and tell activists they remained faithful to the cause.
Boehner, in an attempt to recover ground after Thursday's debacle, rewrote his bill to make it more appealing to the Tea Party wing of his party. But even if the House was to pass that version, the Senate would vote it down. The White House, too, promised to veto it because it would only be a stop-gap measure, lasting only through to February or March with the prospect of another crisis then.
Reid, speaking on Friday morning in the Senate, described Thursday as a wasted day because of the Republican fiasco in the House and the blamed the crisis on "extremists in the Tea Party". He called for mainstream Republicans to back a compromise. "Will the Republicans back away from the shrill voice of the Tea Party and return to the Republican party of Ronald Reagan?" he said.
He urged McConnell to meet him to resolve the stalemate.
"I will listen to any idea to get this done in a way that prevents a default and a dangerous downgrade to America's credit rating. Time is short, and too much is at stake, to waste even one more minute," Reid said. He will push to a vote his plan to raise the debt ceiling and to cut about $2.5tn in spending over the next decade.
McConnell also took to the floor of the Senate and did not sound encouraging about a deal, though he may be saying something different in private.
"Lawmakers should be working a solution to this crisis, not a blocking strategy. Our Democrat friends here in the Senate have offered no solutions to this crisis that could pass either chamber," McConnell said. He blamed Obama too, accusing him of having blown up a bipartisan compromise last week.
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