CTV News.ca Staff
Date: Mon. Aug. 1 2011 9:28 PM ET
The U.S. House of Representatives has passed a deal to increase the country's $14.3 trillion debt ceiling for 22 months, less than 24 hours before a deadline that could have led to the first-ever federal government default.
The House voted 269 to 161 in favour of the compromise deal, which was announced by President Barack Obama late Sunday. It needed 216 votes to pass.
In an emotional moment minutes before voting began, Congresswoman Gabrielle Giffords appeared on the House floor for the first time since being shot in the head while meeting constituents in her Arizona district in January.
Giffords waved and smiled at her colleagues who gave her a standing ovation after the vote, with many approaching her for long embraces.
"It means so much to our country ... to witness the return of our colleague who is the personification of courage, of sincerity, of admiration throughout the country," Democratic leader Nancy Pelosi told the House.
Both chambers must approve the plan to avert an unprecedented government default on payments to Social Security recipients, military veterans, Treasury bond investors and others.
Senate Majority Leader Harry Reid announced Monday night that the Senate will vote on the deal at noon ET on Tuesday.
Republicans and Democrats broke through weeks of political gridlock on Sunday evening when the rival sides reached a last-ditch compromise.
Though Obama conceded that the plan wasn't what he wanted, he said the agreement is enough to appease Congress and avert economic chaos. Obama initially endorsed a plan drafted by Reid that extended the U.S. debt limit until 2013.
Before Monday's vote, Obama, sent a video message to Congress.
"This has been a long and messy process," he said. "As with any compromise, the outcome is far from satisfying."
Obama reluctantly approved the plan and said Sunday it will allow Congress "to lift the cloud of doubt and uncertainty" that has hung above the United States for weeks.
Not only could a potential default trigger another recession, but the head of the International Monetary Fund (IMF) warned that a U.S. fiscal crisis could also wreak havoc throughout global markets.
But the deal angered both right-wing Republicans, members of the so-called tea party movement within the party, and left-wing Democrats.
Republicans managed to keep tax cuts proposed by Obama out of the final deal, while Democrats got a long-term debt ceiling extension that was unpopular with the GOP.
But some Republicans are angered by the deal's deep cuts to defence spending, while Democrats fear key social programs will be slashed.
Before Monday's vote, House Speaker John Boehner said the deal will "solve this debt crisis and help get the American people back to work."
Boehner worked hard behind the scenes before the vote to get as much of the Republican caucus on side.
The deal
The plan involves raising the U.S. federal debt limit in two stages by at least $2.2 trillion, which would tide the Treasury over until after the 2012 elections.
Other key elements of the plan include:
- Cuts in government spending phased in over a decade. (Potential targets include: the Park Service, Internal Revenue Service and the Labor Department.)
- Zero benefit cuts to the Social Security pension system or Medicare, but the plan promises that savings will be looked for elsewhere.
- Taxes are reportedly unlikely to rise.
- The creation of a new congressional committee that will have until the end of November to recommend $1.8 trillion or more in deficit cuts. (Those deficit cuts would allow a second increase in the debt limit, which would be needed by early next year.)
Markets respond
With a preliminary debt deal in place, global markets showed signs of relief Monday morning before dipping later in the day on poor manufacturing news.
Positive gains for Asian and European shares set the stage for Wall Street, as it enjoyed a strong opening on Monday.
Both the Dow and S&P 500 futures opened 1.2 per cent higher. The Dow, in particular, reacted positively to Washington's breakthrough.
The industrial average rose by 100 points on Monday morning, but the gains petered off at about 10:20 a.m. when the Dow fell following the release of the report containing weak manufacturing data.
The Dow closed down 10.75 points, or 0.09 per cent, Standard & Poor's 500 Index dropped 5.34 points, or 0.41 per cent, and the Nasdaq Composite index fell 11.77 points, or 0.43 per cent.
It is not yet known how U.S. credit agencies will react to the debt plan, but a former Kentucky state treasurer predicts most investors are now wary of the greenback.
"If I'm with China or another country that is another big creditor I'm going to think twice about using the U.S. dollar," Jonathan Miller told CTV News Channel on Monday.
However, Miller added that cautious creditors are better than a potentially disastrous default scenario.
"Ultimately it's not going to have a dramatically bad effect like what would have happened with a debt default," he said.
Effect on voters
If the deal passes both chambers, it will extend the debt ceiling through the next U.S. election.
The desire for re-election weighed heavily on the minds of U.S. lawmakers as they debated the nation's debt limit, said a University of Western Ontario political scientist.
Debt-limit discussions seemed to be overwhelmed by political posturing, UWO's Donald Abelson told CTV News Channel on Monday.
But despite a desire to appear tough on each of their election promises, Abelson said infighting among U.S. lawmakers may have annoyed -- rather than impressed -- voters.
"I think the American people are growing tired of all the political infighting on Capitol Hill," he said. "They want to see a government in place that's going to address their needs."
Though Abelson predicted that partisan bickering will continue in Congress, he also said voters will likely voice their disappointment in their elected officials.
Investment broker Peter Schiff says no politician will emerge unscathedf rom the tense negotiations.
"They're going to have to raise the debt ceiling again before 2012," the president of Euro Pacific Capital told CTV News Channel on Monday.
Schiff said he does not believe Washington's current agreement adequately addresses government spending. He said it puts America on the path to financial ruin.
"I think the economy is going to be back in recession," he said in an interview from Westport, Connecticut. "The question is, who will Americans blame?"
With files from the Associated Press
