US Senate leaders reach deal to end government shutdown

Democratic leader Harry Reid announces agreement at start of Senate session

US Senate Majority Leader Harry Reid walks to his office as he arrives at the US Capitol in Washington today. The US Senate prepared for a last ditch effort to avoid a historic lapse in the government’s borrowing authority, a breach that President Barack Obama had said could lead to default and deliver a damaging blow to the global economy. Photograph: Jonathan Ernst/Reuters

US Senate Majority Leader Harry Reid walks to his office as he arrives at the US Capitol in Washington today. The US Senate prepared for a last ditch effort to avoid a historic lapse in the government’s borrowing authority, a breach that President Barack Obama had said could lead to default and deliver a damaging blow to the global economy. Photograph: Jonathan Ernst/Reuters

Wed, Oct 16, 2013, 18:40

US politicians have struck a last-minute deal to avert a catastrophic debt default that threatened to derail the global economy.

Stock markets rallied as Democrat and Republican leaders in the Senate reached an agreement to avoid missing a looming deadline on the US borrowing ceiling.

The deal was the culmination of weeks of political brinkmanship as opponents on both sides refused to blink.

It came after shares began to turn sharply downwards with the deadline approaching amid a warning from billionaire investor Warren Buffett that the debt ceiling was a “political weapon of mass destruction”, comparing the threat of default to a nuclear bomb.

The International Monetary Fund had warned at the weekend that a default risked plunging the world back into recession.

Earlier during the crisis, even after an initial deadline was missed resulting in a partial shutdown of the US government, traders had been reluctant to start selling stocks - apparently believing it was impossible politicians would allow a default to happen.

But as the days before the deadline turned to hours, there were warnings that markets might be on the verge of panic and around the world, share index screens began to turn red as they headed downwards.

However the mood was transformed as reports of a deal began to take shape, with Wall Street’s Dow Jones Industrial Average up more than 200 points at one stage and the FTSE 100 recovering losses to finish ahead at the close.

Democratic leader Harry Reid said Senate leaders had reached an agreement to avoid the default and end the 16-day-old shutdown.

Non-essential government services closed during that period would be reopened - but only until a new deadline of January 15th for the time being.

America’s borrowing authority was increased until February 7th.

Mr Reid said: “The compromise we reached will provide our economy with the stability it desperately needs.”

The Republican-controlled House of Representatives and the Senate, which has a Democrat majority, must still approve the plan before it is signed off by president Barack Obama in time to meet the debt deadline.

US politicians have until tomorrow to raise America’s $16.7 trillion debt ceiling - lifting the cap on how much it can borrow.

Otherwise they risk the administration being unable to honour IOUs on Treasury debt, a mainstay of the global economy.

US Treasury secretary Jack Lew has warned the country would only have about $30 billion of cash reserves left - about the current market value of British Gas owner Centrica - if politicians did not strike a deal.

“If we have insufficient cash on hand, it would be impossible for the United States of America to meet all of its obligations for the first time in our history,” said Mr Lew.

While America would be unlikely to run out of money instantly, it would have to prioritise debt payments, such as an interest payment on its debt due on October 31st, meaning other bills could go unpaid.

PA