Obama appeals to public over debt crisis

Obama stepped to the microphones in the White House after another day of political wrangling in Washington which has ended with rival plans to avoid the US defaulting on its loans and no compromise in sight.

The President declared: "The American people may have voted for divided government, but they didn't vote for a dysfunctional government."

The Republicans would cut discretionary spending by $1.2trn, set up a powerful Congressional committee to zero in on more savings and increase the federal government's overdraft by $900bn, which would allow the government to pay its bills for a few more months.

Obama said this "wouldn't solve the problem". Democrats want the ceiling raised much higher, so the government will be funded until after the 2012 presidential election.

A separate plan put forward by the Democratic Senate Majority leader Harry Reid would cut $2.7trn of spending, nearly a third of which would come from the savings achieved by the US drawing down its troops in Afghanistan and Iraq.

Crucially, it accepts two key Republican demands: no taxes would be raised and one dollar would be cut for every dollar added to the country's massive debt.

However, Republicans will have to be convinced: the Senate Democrat's plan would fund the government until 2013, which the party leadership believes is an attempt by the President's party to ensure his re-election.

Shortly after the President had finished his address, the Republican leader of the House of Representatives, John Boehner, delivered a rebuttal.

He said: "The sad truth is that the president wanted a blank cheque 6 months ago, and he wants a blank cheque today.

"That is just not going to happen."

Directly challenging Obama, Boehner said: "There is no stalemate in Congress."

He said the Republicans' newest legislation would get passed by the House and could clear the Senate.

But time is running out.

There are dire predictions from the US Treasury if the government runs out of money to pay its creditors.

It argues failing to agree a package would harm America's credit rating, make the cost of borrowing more expensive and that would eventually trickle down to every household in America and perhaps trigger another global dip.

Some Republicans, including those with Tea Party sympathies, believe the White House is trying to scare American into compliance so President Obama can keep government spending high.

Earlier, the International Monetary Fund warned US default would have "significant global repercussions, given the central role of US Treasury bonds in world financial markets.