FIGHTING American leaders edged closer to a deal last night with just two days to go before the US runs out of cash to pay the interest on its debts.
Jittery markets crept up on renewed hopes that the government can avoid a default, which could happen on Thursday 17 October if no budget deal is reached.
Both the Democrat-led Senate and Republican-dominated Congress are now looking for a short-term increase to the debt ceiling.
Negotiations in the Senate yesterday gathered enough pace for the President to call off a meeting he had planned with party leaders, allowing the talks to continue.
Democrat senators offered a deal that would re-open the government for six weeks and raise the debt ceiling until the middle of next year.
The offer represents a move closer to a recent Republican offer to push the debt ceiling back until mid-December.
The Democrat leader in the Senate, Harry Reid, said “tremendous progress” is being made towards reaching a deal, but added “we are not there yet”.
A deal based on either offer would give the two sides more time to thrash out a solution to re-open the government on a more permanent basis and try to resolve underlying problems.
“We expect there will be an agreement in the next day or so, but there is a lot of fear,” said analyst Ralph Bassett from Aberdeen Asset Management.
If no deal is reached by 17 October, the government will run out of money to pay essential bills and services, meaning it could default on some of its debt interest payments.
That would send shockwaves around the global economy, as US government debts are widely treated as the world’s least risky asset – a status that would be severely knocked if interest is not paid.
Very short-term alternatives to the default could be tried, but they would be painful and legally unsound, for instance not paying pensions.
Non-essential federal services have been shut since 1 October, with 800,000 staff temporarily off work until an agreement can be reached.
The Dow Jones Industrial Average rose 0.42 per cent on hopes of a deal, and the S&P 500 rose 0.41 per cent.