Senate fails to advance legislation as debt “catastrophe” looms

The Senate failed on Sunday to advance Majority Leader Harry Reid's debt ceiling legislation, even as lawmakers say progress is being made on a final agreement that they hope can pass before the Aug. 2 deadline to avoid a federal default.

The vote was initially planned for late Saturday but took place Sunday afternoon. It proved pointless because leaders failed to reach agreement on terms of a new plan. The Senate could return to vote on it again Sunday evening if an agreement is reached, the Los Angeles Times reported.

"We're cautiously optimistic," Reid said earlier of talks with his Republican counterpart, Mitch McConnell of Kentucky. But he added: "As we know, one problem can stop the whole agreement from going forward."

Treasury has said it will run out of funds to service the country's debt by Tuesday unless a deal is struck to raise the $14.3 trillion borrowing limit.

"There are negotiations going on at the White House to avert a catastrophic default on the nation’s debt,” Reid said, according to The Washington Post. Reid said he's also spoken with Vice President Joe Biden, who is playing a key role in the raced negotiations before the nation could lose the authority to continue borrowing money to pay its bills, the LA Times reported.

"There are many elements to be finalized and there is still a distance to go before any arrangement can be completed," Reid said.

Democrats had been scheduled to vote on Reid's own debt-limit package at 1am Sunday but he said the vote had been pushed back about 12 hours to allow the negotiations to run their course.

"I believe we should give everyone as much room as possible to do their work," he said.

House Speaker John Boehner was scheduled to hold a conference call with fellow Republicans later Sunday to discuss that framework and gauge his party's support. McConnell may also meet with the full Senate Republican conference, and said they were "very, very close," to a deal.

The developments were interpreted as a positive sign that the mood in the U.S. capital may be softening toward an 11th-hour compromise to save the world's biggest economy from default.

In weeks of tense talks, both sides of the debate have rejected each others' proposals for slashing the deficit, without which the Republican majority in Congress say they will not approve a rise in the debt ceiling.

Democrats backed by President Barack Obama want a mixture of spending cuts and tax hikes for the richest Americans, while Republicans including Tea Party fiscal hawks have ruled out higher taxes.

The BBC reported that Republican leaders had expressed confidence that a deal could be struck to raise the nation's debt limit before Tuesday.

McConnell said there was "a level of seriousness with the right people at the table". Senior Senate Democrat Richard Durban noted "a more positive feeling."

"I’m glad to see this move toward cooperation and compromise," Reid added, according to The Washington Post. "I hope it bears fruit."

(Earlier on GlobalPost: SENATE GOP REJECTS REID'S COMPROMISES)

Obama supports Reid's plan to trim $2.2 trillion from deficits and raise the debt ceiling by $2.7 trillion, enough to keep the issue off the agenda until after the 2012 elections.

Republicans in the House of Representatives approved a rival proposal on Friday but Democrats in the Senate quickly shot it down. It envisages spending cuts of $900 billion with a similar rise in the debt ceiling, meaning the debate would have to be waged again in the middle of the 2012 presidential campaign.

Share markets around the world have tumbled and the dollar has fallen in value as investors weigh up the prospect of a U.S. default.