A DEAL on raising the US debt ceiling has been struck. But will the Congress vote for it and prevent global financial chaos? Here's how the drama unfolded.
- �US has until midnight Tuesday to pay back debt
- Republicans and Democrats finally do a deal
- Financial markets on edge awaiting news
11.35am We're wrapping up our live coverage of the US debt crisis now. Check back in our business section for further updates as they come to hand.
11am Joe Biden has denied calling the Tea Party terrorists. "I did not use the terrorism word," Mr Biden said.
10.54am Japanese stocks have also fallen.
10.30am Australian shares have dropped one per cent on open.
10.29am Japan, the second-largest foreign holder of US debt after China has hailed the deal. Beijing made no official comment, but its state-controlled television called the package "more pomp and ceremony than substance".
10.21am What does the debt deal mean for defence?The package cuts $US350 billion ($A320.1 billion) in defence spending over the next 10 years. Further cuts will then be made by the special committee.
The US military budget last year was around $US700 billion, by far the largest in the world. Reducing spending means winding down commitments in Iraq and Afghanistan. Other analysts have suggested the US could pull troops out of Japan.
As seen with the Libyan conflict, other nations will be expected to take more of a role.
9.44am The three main ratings agencies declined to comment on the prospect of future downgrades, AP reports. But the agencies, along with economists and analysts, have signaled that doubts about the nation's debt will persist.
Moody's Investors Services has said it will probably rate the U.S. debt as AAA for now but with a negative outlook - a rating that indicates a possible downgrade yet to come.
Fitch Ratings has indicated the deficit must be reduced to a "more sustainable level" for the U.S. to maintain its AAA rating. And Standard & Poor's has said any deal to raise the debt ceiling must cut at least $4 trillion from future budget deficits or the rating will probably be lowered to AA.
9.37am The debate actually stopped people in the street. AFP took this photo of two men watching a breaking news alert in New York as the House of Representatives successfully pass a bill to raise the national debt limit.
Two men watch a breaking news alert in New York as the House of Representatives successfully pass a bill to raise the national debt limit. Picture: AFP
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9.34am So what does that actually mean for you? One source of AAA debt is Australian bonds, so as we saw in the last week, investors need to use Australian dollars to buy Australian bonds. The more people who want our dollar, the higher our dollar goes. The higher dollar is good news for Aussie's travelling overseas but not so good news for businesses trying to export their goods. If our metals, wool, grains and meat are all more expensive, other countries may look elsewhere. That loss of business would cost Australian jobs.
9.19am Analysts are already questioning whether the deal will be enough to save America's AAA credit rating. All banks around the world are required to carry AAA debt on their books. If the US debt is suddenly AA, they will need to find another source of AAA debt.
9.12am Congresswoman Gabrielle Giffords returned to Washington, DC, today to vote for the debt limit compromise bill.
Ms Giffords was seriously injured in a shooting rampage in Tucson, Arizona, in January that killed six and left 12 others wounded.
Democrat Congresswoman Gabrielle Giffords before and after she was shot in the head as she met with constituents in Tucson, Arizona.
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9.11am Now the Bill is headed for the Democrat controlled Senate where it is expected to pass.
9.10am Here's the numbers 269 in favour 161 against.
9.06am The deal has passed the House of Reps!
9.05am Don't have time for all this reading? The Huffington Post has pulled together a video - debt ceiling media coverage in two minutes.
9.04am The debate in Congress has about 2 minutes left to go.
8.51am Obama's top lawmaker Nancy Pelosi has urged her colleagues to support the debt deal.�
"Please think of what could happen if we defaulted. Please, please, please come down in favour of preventing the collateral damage to our seniors and our veterans." -� Nancy Pelosi
8.51am In what may be a preview for the opening of the Australian stock market, NZ stocks have tumbled. And the blame has been laid on the US.
8.27am What does the deal mean for the rest of the world? Time reported Michael Schuman argues that this deal will affect more than just financial markets. He says
- The world can forget about the US stimulating global economic recovery.
- The fact the deal defers some decisions means world markets will be plagued by uncertainty for some time to come.
- Significant cuts to defence spending will mean the US can no longer be relied upon for global security. Everyone from the Saudi royal family to the Taliban, he says, will be watching and looking for weakness.
- It will hasten the decline of the decline of American influence over the global economy.
8.18am Here's an interesting opinion piece on the politics involved in this debate written in The Guardian. Republicans smell victory with a 'sugar-coated Satan sandwich'. The headline says it all really.
8.17am Badges for sale are displayed during a Tea Party Express rally on Waterbury Green in Connecticut. Picture: Win McNamee
Badges for sale are displayed during a Tea Party Express rally on Waterbury Green in Connecticut. Picture: Win McNamee
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8am T stands for Terrorist. Well, that's the line out of Washington. Vice President Joe Biden has accused the Tea Party of acting like terrorists, according to Politico and the Huffington Post.
Biden was agreeing with a line of argument made by Mike Doyle� at a two-hour, closed-door Democratic Caucus meeting.
"We have negotiated with terrorists,? an angry Doyle said, according to sources in the room. ?This small group of terrorists have made it impossible to spend any money.?
Biden, driven by his Democratic allies? misgivings about the debt-limit deal, responded: ?They have acted like terrorists,? according to several sources in the room.
7.26am So what is the Tea Party? The modern US Tea Party movement draws inspiration from the Boston Tea Party of 1773, which was a protest by American colonists against British taxes and emerged in the United States in 2009.
It endorses reduced government spending, opposition to taxation in varying degrees, reduction of the national debt and federal budget deficit.
Several Republican incumbents have been replaced by so-called "Tea Party" candidates, most recently Delaware congressman Mike Castle, who has been replaced by the Tea Party-backed Christine O'Donnell.
Here's a Wikipedia entry on the Tea Party. And here is a good Tea Party summary by the New York Times.
7.07am Looks like this bill might not pass so smoothly. According to the New York Times, Republican candidates for president are planning to vote against it.
These candidates are heavily influenced by the Tea Party (more on that in a few minutes). They want Tea Party members to support them in their bid for president. The Tea Party don't want the deal, so these Republicans are going to vote against it.
The most prominent candidate Mitt Romney is speaking out against the deal the loudest and clearly positioning himself for a run as president.
?As president, my plan would have produced a budget that was cut, capped and balanced ? not one that opens the door to higher taxes and puts defense cuts on the table. President Obama?s leadership failure has pushed the economy to the brink at the 11th hour and 59th minute.?
6.56am Russian Prime Minister Vladimir Putin has accused the United States of acting as a "parasite" on the world economy by accumulating massive debts that threaten the global financial system.
"The country is living in debt. It is not living within its means, shifting the weight of responsibility on other countries and in a way acting as a parasite.
"If the US encounters a systemic malfunction, this affects everyone. There should be other reserve currencies."
Russian Prime Minister Vladimir Putin holds a pan as he visits a summer camp run by the Nashi youth group at Lake Seliger. Picture: AFP
Source: No Source
Russian Prime Minister Vladimir Putin holds a pan as he visits a summer camp run by the Nashi youth group at Lake Seliger. Picture: AFP
Tuesday 2 August 6.17am Alison Godfrey back for another round of live blogging on the debt crisis. Here's a summary of the main events from overnight.
There is only a few hours left before the deadline for the US to pay back it's debt.
Democrat and Republican leaders are currently making their final arguments, trying to convince the skeptics ahead of a vote early this morning.
There is relief that a deal may actually be made. But no joy. As Senator Harry Reid put it: ?People on the right are upset. People on the left are upset. People in the middle are upset.?
Asian stock markets soared on news of a deal. That's good news for Aussie super funds that have Asian stocks as part of their portfolio. But then again, any gains could be wiped out by the cost of living increase and a possible rate rise today.
The deal was met initially with relief on global financial markets but investors then began to have doubts about the plan and gains were reversed sharply.
Monday 1 August 10.15pm If you're struggling to get your head around the debt crisis, you're not alone. Average Americans are confused too. Below are excerpts from an AP report on the diverse reactions from the US public.
From a former Obama campaign volunteer, angry over the concessions the President has made:
I'm actively opposed to this president now. That also goes for his party since they've been silent through the whole ordeal. Cutting the deficit will do nothing to get people jobs. Without jobs and without a liberal base, he will lose.
From a 25-year-old student, resigned to the fact his generation will have to pay for government programs far into the future:
It's something expected. It's not a surprise. I'll be paying bills, student loans, a mortgage for the next 30 years. I'm not going to let this bring me down. It's one more thing I'll owe. When you're born, you start owing.
8.30pm President Barack Obama may have to miss his own 50th birthday party on Thursday. The milestone event, falls two days after the deadline, appears likely to be overshadowed by the nasty tussle with Congress over money. The president said on radio recently:
What I really want right now is to, to get a debt-ceiling deal for my birthday.
6.20pm News.com.au reporter Sonja Koremans has put together a handy FAQ on the US debt crisis and where it's headed from here.
5.00pm Australian shares have rallied 1.65 per cent after the breakthrough deal to increase the US's debt ceiling was announced. The benchmark S&P/ASX 200 closed 73.2 points higher at 4497.8 and the broader All Ordinaries gained 72.6 points to 4573.1. IG Markets analyst Ben Potter described it as a "relief rally":
For today at least, investors are just happy we seem to have averted an apocalyptic event.
2.40pm Oil prices rose above $97 a barrel in Asia after the last-minute deal to raise the US government's debt limit. Benchmark oil for August delivery was up $1.41 to $97.11 a barrel at midday Singapore time in electronic trading on the New York Mercantile Exchange. Crude dropped $1.74 to settle at $95.70 on Friday.
2.05pm Shadow treasurer Joe Hockey says Australia must learn lessons from the US debt crisis and rein in spending.
There's a salient lesson here for governments right around the world and particularly the Australian government. Don't keep spending too much money. Don't accrue that debt. You don't have to get to a position like the United States to realise government debt is an ongoing sore that is going to come back and bite governments that waste too much money.
1.50pm US politicians weren't alone in their race against time in recent weeks.
The star of the debt crisis "theme song", Remy Munasifi, was desperately trying to finish his debt-crisis inspired YouTube rap video before the deal was reached.
He needn't have worried. The bickering went on, the video was posted last week, and has now notched up more than 250,000 hits.
"We didn't think we'd have enough time. I kept saying, ?Aw, they're going to solve it tomorrow,'" Munasifi told FOX News.
"Days became weeks, and so finally last week we were like ?let's just do it.'"
1.12pm That's the last of my live coverage for the day. Mel Browning will be taking over for the afternoon. I'll be back on deck tomorrow. Cheers, Alison Godfrey.
1.05pm The global economy will grow in confidence if the US can demonstrate it is on a path to a sustainable budget position, Treasurer Wayne Swan has told ABC Radio.
What markets are really looking for is a long-term path back to fiscal sustainability. If they can demonstrate that, we'll see a lot more confidence in global markets and that can only be good for the global economy and, of course, the Australian economy.
12.15pm Reuters reports the US debt showdown has caused problems for policymakers and firms in other parts of the world.
The scramble for Swiss francs and yen means Switzerland and Japan are having to cope with an erosion of export competitiveness. Japanese officials are already speaking out against the yen moves and FX markets are wondering when they will follow it up with intervention.
Money traders work under a screen flashing the U.S. dollar against the Japanese yen at a foreign exchange market in Tokyo. Picture: Shizuo Kambayashi / AP
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Money traders work under a screen flashing the US dollar against the Japanese yen at a foreign exchange market in Tokyo. Picture: Shizuo Kambayashi / AP
12.05pm A White House fact sheet lays down the specific elements of today's deal to raise the debt ceiling:
��� * The president will be authorised to increase the debt limit by at least $2.1 trillion, eliminating the need for another increase until 2013.
��� * The first round of cuts will come in at nearly $1 trillion. That includes savings of $350 billion from the Base Defense Budget, which will be trimmed based off a review of overall US national security policy.
��� * A bipartisan committee will be responsible for finding $1.5 trillion in deficit reduction from both entitlements and tax reform, as well as other spending programs. The committee will have to report out legislation by November 23, 2011.���
��� * Congress will be required to vote on Committee recommendations by December 23, 2011.
��� * The trigger mechanism - should the committee's recommendations not be acted upon - will be mandatory spending cuts. Those cuts, which will begin in January 2013, will be split 50/50 between domestic and defense spending. Social Security and Medicare beneficiaries and "low-income programs" would be exempt.
11.50am Australian shares soar two per cent after news of a US debt deal. Shares were already up ahead of the announcement but doubled gains when President Obama told the world a deal had been done.
11.38am Even if the US avoids default and manages to keep their AAA credit rating - The New York Times reports the damage to the US economy and international reputation may have already been done.
"It has chipped away at the global authority of President Obama, who was celebrated abroad when he came to office as a man who would end an era of American unilateralism. Now the topic of discussion in other capitals is whether the Age of Obama is giving way to an Age of Austerity, one that will inevitably reduce America?s influence internationally.
... times have changed, America can no longer afford neither new Marshall Plans nor new wars ...
For all the talk on the right about ?American exceptionalism,? especially among members of the Tea Party, it put doubts in the minds of many about whether America?s military and economic dominance is something the country is still willing to pay for ? and will always survive"
11.29am House Speaker John Boehner was tepidly positive on the deal, saying it is a victory for the small government principles of the party despite being less than ideal. Boehner painted the deal as victory for the Republican party because it did not include revenues, which Democrats have long called for as part of a final deal.
?Now listen, this isn?t the greatest deal in the world. But it shows how much we?ve changed the terms of the debate in this town.
"There is nothing in this framework that violates our principles. It?s all spending cuts. The White House bid to raise taxes has been shut down."
11.27am Why does the US have a debt ceiling if they just keep raising it? Is the debate just about politicians using the debt ceiling vote for their own political gain?
11.02am Here's some of what Obama had to say. Basically he says it's not the deal he hoped for, but it's good enough. The agreement does ensure that the US will not default on its debt obligations - as long as it passes through the Senate and the Congress.
US President Barack announces that he and top lawmakers had reached an 11th-hour deal to avert a disastrous debt default. Picture: Jewel Samad / AFP
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"Is this the deal I would have preferred? No. I believe we could have made the tough choices required on entitlement reform and tax reform right now, rather than through a special congressional committee process.
"This has been messy, it's taken far too long. Nevertheless, the leaders of both parties have found their way toward compromise, and I want to thank them for that.
"We're not done yet, I want to urge members of both parties to do the right thing and support this deal."
10.49am Finally we have a deal. Congressional leaders have reached an agreement on raising the US debt limit, President Barack Obama has announced. The deal will cut about $US1 trillion in spending over 10 years, the president announced.
US Senate Minority Leader Mitch McConnell of Kentucky gives the the thumbs-up as he walks to the Senate floor after a deal was reached to avert a US default. Picture: Nicholas Kamm / AFP
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10.42am The Guardian has a list of companies and countries that are now now worth more to investors than the United States. Good news is that Australia is on the list. So is Johnson & Johnson, Exon Mobil, Phillip Morris and Kraft.
10.27am The Australian stock market has opened higher on hopes that the US will actually do a deal.
10.15am The Guardian has an interesting opinion piece on the US debt crisis, arguing that the world's largest economy has a debt addiction and they need to change.
"If the US were any other country it would be seeking help from the International Monetary Fund (IMF). It is considered a blessing that the dollar's role as the global reserve currency of choice means that Washington does not have to suffer this indignity, but in reality the blessing has turned out to be a curse. The security blanket provided by the dollar has allowed Americans to believe that if they close their eyes all their problems will go away."
9.49am� Apple has more cash than the US Government. The US Treasury's cash balance fell to $US74 billion this week. That's less than the $US76 billion that Apple now has in cash. Ok, so that's not actually Apples with apples.
Apple's billions are the funds in its bank accounts, while the US billions represents the amount of money the government has left before it hits the legal debt limit.
Apple CEO Steve Jobs delivers the keynote address at the 2011 Apple World Wide Developers Conference at the Moscone Centre in San Francisco.
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9.27am The latest US deal. The plan that is currently on the table in the US would raise the federal debt limit in two stages by at least $US2.2 trillion ($A2 trillion), enough to tide the Treasury over until after the 2012 elections.
Big cuts in government spending would be phased in over a decade. Thousands of programs - the Park Service, Internal Revenue Service and Labor Department accounts among them - could be trimmed to levels last seen years ago.
No benefit cuts were envisioned for the Social Security pension system or Medicare, the federal program that provides health care payments to the elderly. But other programs would be scoured for savings - including farm subsidies. Taxes would be unlikely to rise.
But what happens next is a sticking point. The Senate plans to form a new bipartisan Congressional committee whose members would be charged with finding more deficit reductions in time for a second increase in the debt ceiling in just a few months. Yep, that means that we could be back here again in a few months time.
There is also disagreement over what happens in that Committee fails to make enough cuts, or agree on what should be cut.
9.11am� Julia Gillard says she expects the Australian economy will be able to absorb the pain of any adverse impact from the US debt crisis.
While we will not be immune from world, Ms Gillard said, events the underlying fundamentals of the economy were strong. with a "huge pipeline" of investment, low unemployment, strong government finances and world-class regulation.
"Of course, we're not immune, we've never being immune to events whether they be in the US or Europe or both of them, they do touch us, touch our shores."
During the GFC the Government gave us all money - an economic stimulus - to keep us spending. But now the government doesn't have a surplus. So there is no money to hand out.
PM Julia Gillard after appearing on ABC radio in the Parliament House studios, in Canberra. Picture: Kym Smith
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8.55am Up until now, China has remained quiet on the debt crisis. That may be because they hold over $1 trillion in U.S. Treasury bonds. Speaking out, some say, may have spooked the markets and hurt their economy.�
But now the crisis has become so serious that China is prepared to have a go.
On Saturday the official People's Daily newspaper, the mouthpiece of the Chinese Communist Party, castigated the US handling of the debt crisis as "irresponsible" and "immoral."
It said the US democratic system was to blame for the "farce," claiming that "not a single representative has considered the world, and even US national interests are being banished from the mind.
T-shirts printed with image of U.S. President Barack Obama dressed in Communist Cultural revolution era military uniform are displayed for sale with others at a shop in Beijing. Picture: Andy Wong / AP
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T-shirts printed with image of US President Barack Obama dressed in Communist Cultural revolution era military uniform are displayed for sale at a shop in Beijing. Picture: Andy Wong / AP
8.47am How much risk does this pose to Australia? The Australian reports that Australia currently holds $12.3 billion in US Treasury securities in the $14.3 trillion market for the AAA-rated government debt.
"What we're talking about here is the largest AAA market in the world being downgraded, so we are into the unknown," Commonwealth Bank chief economist Michael Blythe said yesterday. "Pretty much everyone's got some exposure in some way."
Andrew Stoeckel, an economist with the Australian National University's centre for applied macroeconomic analysis, said a downgrade of US debt could be a "big deal for the long term".
"Banks and insurance companies around the world have certain minimum requirements to hold a certain proportion of their assets in AAA-rated securities," he said.
8.34am The International Monetary Fund managing director Christine Lagarde has spoken to CNN of her fears about the US debt crisis.
"The world is watching the United States with trepidation, with anxiety, with concern, but also with hope. Instability is never a good idea, never a good idea. And this level of uncertainty, the trepidation arising from August 2, is bringing about a lot of instability." - Christine Lagarde IMF
IMF Managing Director Christine Lagarde. Picture: Brendan Smialowski / Getty Images
Source: No Source
IMF managing director Christine Lagarde. Picture: Brendan Smialowski / Getty Images
8.26am More on the banks getting jittery over political inaction on the debt crisis. Banking executives rarely stick their neck out in the US. Here's a copy of a letter from 14 banks sent to the Senate urging them to do a deal. In it they warn that if a deal isn't done, interest rates will rise, the dollar will fall and the economy will be in dire straights.
Monday, August 1, 8.00am Hi, this is Alison Godfrey resuming coverage of the US debt crisis. Here's a summary of what happened overnight:
- Senator Harry Reid, the majority leader, has tentatively signed off on the budget deal being negotiated with top Republicans by the White House after they rejected his latest plan.
- If the majority of Democrats follow his lead, a deal could be done.
- Wall Street executives have descended on the White House begging for them to do a deal and warning of dire consequences if they don't.
- Gold has once again hit a record high as investors fear the US will default.
- The Aussie dollar in the first few minutes of trade has already started rising.
Read more of our live coverage of the US debt crisis with explanations, analysis and updates here
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