Senate votes to raise US debt limit until December

The US Senate has voted to extend the debt ceiling until December 3, providing short-term relief to investors and executives who had fretted about a government default as soon as this month.

The upper chamber of Congress voted late on Thursday along party lines, 50-48, to extend the public borrowing limit by $480bn and avoid a default for the next two months.

The measure was able to pass the 100-member chamber by a simple majority after a crucial procedural vote earlier in the night. The procedural vote saw 11 Republican senators join all 50 Democrats in voting to end the debate on the bill and clear the 60-vote “filibuster” threshold.

“I said we needed to pass a bill to address the debt limit by the end of the week, and that is exactly what we did,” said Chuck Schumer, the Senate’s top Democrat.

The measure will need to be approved by the Democrat-held House of Representatives before it is sent to president Joe Biden to be signed into law.

Earlier on Thursday, Schumer told lawmakers he had reached a deal with Mitch McConnell, the Senate’s top Republican, after McConnell said his party would back a short-term extension to the nation’s borrowing limit. Republicans have for months rejected Democrats’ appeals for them to sign on to raising the debt ceiling, seeking to tie the country’s existing debt to the Biden administration’s ambitious spending plans.

Many rank-and-file Republicans objected to the deal brokered by McConnell, accusing their leader of capitulating to the demands of Democrats.

Biden leaned on corporate leaders this week to help him make the case for why Congress needed to act to raise the debt ceiling and avoid default. Janet Yellen, the Treasury secretary, had warned that the US government risked running out of money by October 18 if no deal was reached.

Cecilia Rouse, head of the White House’s Council of Economic Advisers, told the Financial Times on the sidelines of the OECD’s ministerial meeting in Paris this week that lawmakers risked “catastrophic” consequences if they do not find a long-term solution to the debt issue.

“If the Treasury reaches the point where it has to default on its obligations, everything is on the table . . . All the ways in which our federal government helps our economy, families and national security would be at risk,” she said.

US stocks climbed and short-term government debt that had been dumped by investors over the previous week rallied considerably late on Wednesday and on Thursday, as traders discounted the risk that the debt ceiling would affect financial markets this month.

The S&P 500 advanced 0.8 per cent on Thursday.

Yields on Treasury bills maturing on October 26 fell 0.04 percentage points to 0.03 per cent, far below the 0.14 per cent at which it had traded on Tuesday. The $4tn short-term bill market, which is a crucial source of funding for the federal government, has been closely scrutinised as the debt ceiling deadline loomed.

However, given the reprieve will only last until early December, investors moved to sell Treasury bills maturing that month. The yield on bills due on December 16 jumped to 0.08 per cent, from 0.05 per cent a day previously. Yields rise when a bond’s price falls.

“The entrenched positions of both sides suggest the deal to suspend the debt ceiling until December may only delay rather than avert a crisis,” said Andrew Hunter, senior US economist at Capital Economics.

“With Republicans unlikely to offer any help beyond that, and the Democrats still insisting that they won’t use reconciliation to enact a longer-lasting debt limit increase themselves, there is a good chance we will end up in the same situation in six weeks’ time.”

McConnell has insisted that Democrats lift the debt ceiling without Republican support using a legislative manoeuvre called reconciliation, which sidesteps the filibuster. But Democrats have argued that reconciliation would be too risky and time consuming and called for Republicans to allow them to proceed with a simple majority vote.

Schumer suggested on Thursday night that Democrats remained opposed to using reconciliation to broker a longer-term solution, saying: “We hope Republicans will join in enacting the long-term solution to the debt limit in December . . . The solution is for Republicans to either join us in raising the debt limit, or stay out of the way and let Democrats address the debt limit ourselves.”

Thursday’s stop-gap measure sets up another possible showdown in the run-up to Christmas. It also follows a separate short-term agreement to fund the federal government until December 3.

If Congress does not reach a deal to continue funding the government by that date, lawmakers will once again risk a government shutdown, which would leave hundreds of thousands of federal employees out of work.

“Eleventh-hour brinkmanship is a given in light of Congress’s prior approach to the debt ceiling and while pondering the catastrophe of a default is an interesting . . . exercise, it will ultimately be an academic one,” said Ian Lyngen, a strategist with BMO Capital Markets.

Additional reporting by Chris Giles in Paris

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