US Senate passes crucial deal to avoid debt crisis days before deadline

The US Senate has voted through a crucial deal to raise the country’s debt ceiling with just days to spare.

Senators followed the House of Representatives in passing the agreement, which will be sent to Joe Biden to be signed into law before Monday’s deadline.

Had the cut-off date been missed, it could have led to the potentially catastrophic scenario where the world’s most powerful economy defaulted on its national debts.

Thursday night’s vote, which ended 63-36 in favour, came after months of bickering between Democrats and Republicans over the state of America’s finances.

The Treasury had warned it would be unable to pay all of its bills on 5 June if Congress failed to act by then, with the debt ceiling standing at $31.4trn (£25.3trn).

Senate majority leader Chuck Schumer said with the deal having passed, “America can breathe a sigh of relief”.

Once signed by Mr Biden, the bill will suspend the statutory limit on federal borrowing until 1 January 2025 – after the next presidential election.

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Mr Biden had thrashed out the terms of the deal himself with House speaker Kevin McCarthy, a Republican.

While Sky’s US correspondent Mark Stone said few really believed the country’s politicians would allow the nation to default for the first time in its history, it required some consensus to be found in a deeply-divided Washington.

The Republicans have controlled the House of Representatives since last year’s midterms, while the Democrats hold more seats in the Senate.

What is the debt limit – and why does it matter?

The aim of the deal is to increase the US debt limit from $31.4trn (£25.3trn) – which it achieves by suspending the borrowing limit rather than setting a new level.

Any default on the national debt would have impacted the economies of the US and the wider world.

It would have meant unpaid civil servant wages, social welfare payments, and health insurance.

And if the US had no longer paid any interest on its bonds – IOUs it issued to raise funds – it would default on debt payments and its credit rating would fall.

A vital way the country raises money – selling bonds – was also at risk.

Economists warned that a prolonged period where the US cannot pay its bills would lead to a near 20% drop in stock prices – and an economic contraction of up to 4%.

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