Senate defies Bush over reconstruction costs

In an embarrassing setback for President George Bush, the Senate has voted to convert half his proposed $20bn (£12bn) reconstruction aid to Iraq into a loan - just days before the United States will try to persuade other countries to give money, no strings attacked.

The rare defeat for Mr Bush on Republican-controlled Capitol Hill came despite intensive lobbying by the White House, including personal sessions between the President and key waverers. But even these was unable to prevent eight Senate Republicans from breaking ranks and joining with the overwhelming majority of Democrats voting for the amendment. It ultimately passed by 51-47 late on Thursday evening.

The loan provision may be reversed in a new vote, or simply vanish when the House and Senate reconcile their versions of the measure granting Mr Bush's request for $87bn of funding for Iraq, of which the $20bn is part. But the rebellion is a sign of the growing public resentment at money being poured into Iraq, at a time of soaring deficits and cutbacks at home.

"It's very hard for me to go home and explain that we have to give $20bn to a country sitting on a trillion dollars worth of oil," said Lindsey Graham, a South Carolina Republican, who backed the loan proposal. "You can't take $10bn of taxpayer money while people are losing their jobs." Tom Daschle, the Democrat's leader in the Senate, claimed that the vote sent a "strong bipartisan" message that that US troops and taxpayers could not "go on shouldering this burden virtually alone".

The setback takes some of the shine off the the administration's diplomatic success at the United Nations a few hours before, in securing a unanimous Security Council resolution that puts a UN seal of approval on the US/British occupation of Iraq.

The White House has argued that to turn all or part of the $20bn into a loan would send the worst possible signal ahead of the donors conference in Madrid, scheduled to start on Thursday. Countries reluctant to contribute funds would be even less likely to do so if they saw that the US was making sure it got its own money back after a certain period.

In the Arab world, bitterly hostile to the invasion of Iraq and where anti-Americanism is growing every day, the loan will strengthen the belief that the US went into Iraq not to help its people but to secure control of the country's oil industry.

Further complicating the issue, the Senate amendment contains the rider that the loan could be reconverted into an outright grant if Iraq's foreign creditors, including France, Russia and Germany, agree to forgive 90 per cent of official debt, around $130bn, run up by Saddam Hussein's regime. But this only increases the risk that assistance for Baghdad will become entangled with the thorny question of Iraqi debt and war reparations. The White House argues that it will give foreign governments indirect control of a key US policy.