Senate Majority Leader Sen. Harry Reid, D-Nev., is surrounded by reporters after leaving the office of Senate Minority Leader Sen. Mitch McConnell, R-Ken., on Capitol Hill on Monday, Oct. 14, 2013 in Washington.Evan Vucci/The Associated Press
Washington is still searching for a way to reopen the U.S. federal government and avoid a debt default, a failure of governance that is sending ripples through global financial markets.
Stock markets in the United States look set for a rocky opening Monday, with the price of contracts that allow traders to bet on the future level of the U.S. main stock exchange dropping 0.9 per cent in trading in Asian markets. Oil prices fell on nervousness that politics would continue to constrain demand in the world's biggest economy. And the U.S. dollar fell against the yen.
The warning signs in Asia could put pressure on politicians to finally end a standoff that has dragged on for two weeks.
The reason for the skittishness in financial markets is disappointment. Global investors went home at the end of last week thinking an end to the latest budget standoff between U.S. President Barack Obama and Republicans was nearing an end.
House Speaker John Boehner stopped demanding changes to the President's 2010 health law, opening a dialogue between the House of Representatives and the White House for the first time in weeks. Stock prices surged on Thursday and Friday, reversing losses that had accumulated since Congress failed to extend the federal government's spending authority on Oct. 1.
The optimism bubble deflated over the weekend.
"They need to deal with this," said Fergus McCormick, the New York-based head of sovereign ratings at Dominion Bond Rating Service, which last week said it was reviewing whether the U.S. still deserves the firm's top rating.
Talks between Mr. Boehner and Mr. Obama broke off. Senate leaders took over and Democratic Majority Leader Harry Reid insisted Sunday afternoon that the talks with his Republican counterpart, Mitch McConnell, were "productive" and "substantive." But after 48 hours of dialogue, they still had nothing concrete to show for their efforts late Sunday.
"We have been led on a very unmerry dance," Kit Juckes, an analyst at French bank Société Générale, wrote in a note to his clients. "As the shutdown persists, the drag on the U.S. economy will increase."
The cessation of non-essential government services is becoming an increasingly frustrating irritant for American businesses. Mortgage brokers can't verify the creditworthiness of potential home buyers because the Internal Revenue Service is closed. John Dewey, who runs a New Jersey-based company that makes compact diesel generators for the military, says Washington's "inconsistent behaviour" is keeping him from investing. "Makes it hard to be a world-class company," he said.
A bigger threat is the possibility the U.S. could default on its debt for the first time. The Treasury estimates it would run out of ways to stay below its current borrowing limit by the end of this week. The inability to borrow would force the government to cut spending dramatically or renege on payments. Failure to pay its debt obligations would constitute a default, risking confidence in Treasuries, the most common form of collateral in the trillions of dollars of loans that are transacted around the world each day.
Jamie Dimon, chief executive of New York-based JPMorgan Chase & Co., one of the world's biggest banks, told an audience in Washington on the weekend his firm has spent some $50-million (U.S.) preparing for a potential default. He would much prefer not to have to implement any of his contingency plans.
"It would ripple through the global economy in a way that you couldn't possibly understand," he said. "We can't have a default."
Mr. Reid and Mr. McConnell spoke on Saturday and again on Sunday – a relative breakthrough in Washington's hyper-partisan politics.
Senators are talking because – unlike House Republicans – most prefer an agreement that would reopen the government and lift the debt ceiling for months rather than weeks. However, they were struggling to agree on the conditions that would be attached.
Talks are based on a bipartisan proposal put together by Senator Susan Collins, a Republican from Maine.
Ms. Collins, who consulted about a dozen senators, suggests leaving in place the across-the-board spending cuts that were implemented earlier this year after Congress failed to find a more elegant way to reduce the deficit. Democratic leaders such as Mr. Reid and Richard Durbin, the assistant majority leader, want to reverse some of those spending cuts.
Despite the apparent lack of progress, senators were confident they would find an agreement. Ms. Collins said on CNN Sunday she worked with a dozen other senators from both parties in putting together her recommendations.
"There are a lot of conversations going on behind the scenes," Ms. Collins said.
"This is about our responsibility to govern," she added. "We are going to see a resolution this week."