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US Senate working on shutdown solution after House plans scrapped

US Senate leaders are working towards a solution to raise the government's debt limit and avoid a Treasury default. The situation took a bleak turn when House Republicans dropped a plan to end the government shutdown.

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Gridlock threatens US credit rating

Senate Majority Leader Harry Reid and Republican Minority Leader Mitch McConnell were optimistic on Wednesday that a deal could be reached to extend the US government's borrowing authority, aides told media.

The agreement would reportedly give the Treasury the authority to borrow through February and for the government to reopen until at least January.

"They are still working on the details between Senators McConnell and Reid," said Senator Dick Durbin, the second-ranking Senate Democrat. "We are making good progress."

The US government could default for the first time in its history on Thursday, when it is expected to run out of "extraordinary measures" to raise its 16.7 trillion dollar debt limit. The uncertainty surrounding the country's finances on Tuesday prompted Wall Street ratings agency Fitch Ratings to warn that its AAA credit was at risk.

House proposals scrapped

Earlier in the day, Republicans in the House of Representatives rejected a shutdown solution plan that included parts of Reid and McConnell's proposal. The House was unable to come up with its own deal - two Republican proposals failed due to lack of support from both the Democrats and the hardcore conservative Tea Party faction of the Republicans.

A sticking point with the Tea Party has been President Barack Obama's healthcare law, which they are determined to amend before agreeing to any budget concessions. The Democrats, meanwhile, have vowed to reject any provision which rolls back or removes portions of the so-called "Obamacare" legislation.

The US and global economies could face damaging repercussions should the government default on its debt. After Fitch made its rating announcement, the S&P 500 futures fell 9.6 points, the Dow Jones industrial average futures sank 60 points and the Nasdaq 100 futures dropped 7.5 points.

Fitch said in a statement on its website that the potential for delayed payments to government suppliers, workers and pensioners "would damage the perception of US sovereign creditworthiness."

"The prolonged negotiations over raising the debt ceiling ... risks undermining confidence in the role of the US dollar as the preeminent global reserve currency by casting doubt of the full faith and credit of the US," the agency added.

Polls show that the government shutdown has had an adverse affect on the Republicans' popularity. A Washington Post/ABC News survey published Monday found 74 percent of Americans disapprove of the Republicans' handling of the financial standoff, compared to a 53 percent disapproval rating for Obama.

dr/jr (Reuters, dpa, AP, AFP)

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