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Democrats rush to raise debt ceiling and avoid ‘catastrophic’ default

Democrats in Congress are scrambling to find a way to raise the US debt ceiling and avert what a chorus of executives and policymakers are warning would be a “catastrophic” default in less than three weeks.

Republicans have repeatedly refused to support an increase in the country’s borrowing limit. On Tuesday the opposition party, led by Senate minority leader Mitch McConnell, closed off a route that would have allowed Democrats to go it alone and raise the debt ceiling with a party-line vote in the upper chamber.

The deadlock means Chuck Schumer, the Senate’s top Democrat, now has about 20 days to find a way of raising the debt ceiling ahead of October 18, when Janet Yellen, the US Treasury secretary, has warned the government will run out of money to meet its obligations to debtholders.

“The only way Congress in this day and age ever gets anything done is by coming very close to deadlines,” said Jim Manley, a former aide to Democratic senators Harry Reid and Ted Kennedy.

He added: “So far, we as a country have not suffered the economic consequences from such political gamesmanship, but at some point, somebody is going to make a mistake and something bad is going to happen to the country.”

The debt ceiling stand-off come as investors are already increasingly jittery over the prospect of “stagflation” — high inflation and lower economic growth — with US stocks suffering their biggest loss since May on Tuesday.

Brian Gardner, a policy analyst at Stifel, said: “Investors should note that there is no clear path to dealing with the debt ceiling. It could be a tense few weeks in Washington which could add to market volatility.”

Top Democrats appeared divided on the best way forward, with Schumer seeming to rule out a complicated legislative manoeuvre known as budget reconciliation that would allow him to push a debt ceiling increase through the Senate with only Democratic votes.

“Using the drawn out and convoluted reconciliation process is far too risky, far too risky,” Schumer said on Tuesday.

But when asked about using the mechanism, Nancy Pelosi, the Democratic Speaker of the House of Representatives, told reporters: “We will see what our options are.”

With little room for error and a rapidly approaching deadline, corporate America has started sounding alarm bells. Jamie Dimon, chief executive of JPMorgan Chase, said on Tuesday that the bank had started to prepare for the “potentially catastrophic event” of a US credit default.

“Every single time this comes up, it gets fixed, but we should never even get this close,” Dimon told Reuters news agency.

Morgan Stanley, another large US lender, has also been planning for the possibility of a US credit default, a bank spokesperson said.

The Business Roundtable, one of Washington’s leading business lobby groups, said on Tuesday that a failure to raise the debt ceiling would pose an “unacceptable” risk to the US economy.

The looming debt crisis has arrived at the very moment that Democratic lawmakers and the White House contend with the possibility of a government shutdown later this week, as well as internal party warfare that risks upending Biden’s entire domestic legislative agenda.

The Democrats had originally tried to tie a bill that would continue funding the federal government to the raising of the debt ceiling. However, that two-pronged bill failed on Monday night in the Senate in a party-line vote amid Republican objections.

Despite raising the debt ceiling three times when Donald Trump was in the White House, Republicans now object to lifting the borrowing limit and accuse Democrats of spending federal funds irresponsibly.

That leaves Democrats under pressure to use a different mechanism to keep the government funded and avert a shutdown ahead of a 12.01am Friday deadline. Republicans have said they would sign on to a “clean” government funding bill if it does not include a provision to expand the borrowing limit.

At the same time, Democrats on Capitol Hill are locked in separate negotiations intended to salvage Biden’s ambitious plans for a $1.2tn bipartisan infrastructure package and a larger $3.5tn budget deal that would make unprecedented investments in social services.

Pelosi has said the House will vote on the infrastructure bill — which has already passed the Senate — on Thursday, but dozens of progressive Democrats have threatened to torpedo the measure, insisting they will vote against it unless they vote on the bigger budget bill first.

Additional reporting by Eric Platt, Andrew Edgecliffe-Johnson and Joshua Franklin in New York, and James Politi in Washington

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