Deal struck to avert US debt default

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 15 for the time being.

America’s borrowing authority was increased until February 7.

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 today to raise America’s $16.7 trillion (£10.4 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 $30bn (£18.8bn) of cash reserves left – around 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 31, meaning other bills could go unpaid.

Democratic leader Mr Reid thanked Republican leader Mitch McConnell for working out an agreement.

Earlier both had been optimistic of reaching a deal that workedDriving the urgency was not only the calendar but also fears that financial markets would plunge without a settlement. Politicians were also concerned voters would punish them in next year’s congressional elections. Polls show the public more inclined to blame Republicans.

Republican Senator Ted Cruz, who had been leading the opposition trying to attach conditions affecting president Barack Obama’s healthcare reforms to any budget deal said he would not delay a vote on the bipartisan budget deal.

Mr Cruz added that he would vote against the bipartisan bill but would not use delaying tactics to stall the legislation. The Texas senator has won praise from the right-wing Tea Party and other conservatives for his actions.