World stock markets including the FTSE rallied this morning after President Barack Obama announced a last-minute deal to raise the United States borrowing limit.
European shares followed Asia higher with London gaining 1 per cent, France 1.1 per cent and Germany 1.3 per cent.
Investors hope the deal will help the US avoid a calamitous default, but the rise was tempered by continuing doubts over the country’s AAA credit rating.
“With President Obama calling it modest, there has to be a degree of concern that they’ve done little more than kick the proverbial can a bit further down the road, ” said IG Markets analyst Cameron Peacock.
“What’s more, the package still has to be voted … but at least markets in general are finding some cheer off the news that default appears to have been averted.”
President Obama urged Congress to “do the right thing” by approving the agreement.
Just two days before a deadline to lift the so-called debt ceiling, the White House and congressional leaders said the compromise would cut about $2.5 trillion from the deficit over the next 10 years but allow Mr Obama’s administration to carry on borrowing money until 2013.
With Republican and Democratic leaders in agreement, the Senate will vote on the proposed agreement on Monday. House of Representatives Speaker John Boehner said he would bring it to a vote in that chamber as soon as possible.
The possibility remains that the bill could be defeated in the Republican-controlled House, but the expectation is that it will pass and a cloud will be lifted from over not just the American but the global economy.
“There are still some very important votes to be taken by members of Congress,” Mr Obama said at the White House on Sunday evening.
“But I want to announce that the leaders of both parties in both chambers have reached an agreement that will reduce the deficit and avoid default – a default that would have had a devastating effect on our economy.”
“I want to urge members of both parties to do the right thing and support this deal with your votes over the next few days,” he added.
The agreement to raise the debt ceiling will allow the US to meet its obligations to foreign and domestic creditors and make millions of routine payments to keep the federal government functioning.
At the insistence of Republicans elected last year amid anger at high public spending, the deal was tied to plans to cut the $14.3 trillion national debt.
The first phase of the two-stage plan calls for $1 trillion in spending cuts over the next decade. The next $1.5 trillion in savings must be found by a special congressional committee by the end of December.
Financial markets showed signs of relief at a deal in the making to meet Tuesday’s deadline, as US stock futures jumped and the dollar rebounded on Sunday.
Democratic Leader Nancy Pelosi, a leading liberal considered crucial to delivering enough Democratic votes to offset Republican defections, suggested earlier that the terms under negotiation would be a tough sell in her party.