What is the debt ceiling?
The amount of money the United States federal government is allowed to borrow by Congress. It applies to debt owed to international and domestic investors in US Treasury bonds, funding for benefit schemes such as Social Security and Medicare, civil servants' pay and numerous other functions of government. The current limit is $14.294 trillion, meaning the US government borrows about 40 cents for every dollar it spends.
What happens if the debt ceiling is not raised?
The US government would, for the first time, be in default. Within days, the US Treasury would have to prioritise payments. Interest owed on bonds, especially to foreign creditors, would almost certainly be paid, as would benefits to the elderly, poor and the unemployed. But the Treasury would have to do default on 40 per cent of its 80 million routine payments, such as military pay, student grants, food grants and the FBI and federal courts. Many civil servants could go unpaid, creating the prospect of a government shutdown.
What has held up a deal?
Under pressure from Republicans, President Obama agreed months ago to link raising the debt ceiling – normally a fairly routine process – to reducing the deficit, prompting fierce negotiations. With Democrats holding the White House and Senate, and Republicans holding the House of Representatives, divided government has verged on the dysfunctional. Democrats were adamant that tax increases should be included in any package but were forced to back down by the Republican-controlled House of Representatives. A small number of Tea Party Republicans then demanded that any deal to raise the debt ceiling should include a constitutional requirement to balance the budget. That failed but ate up weeks of negotiating time.
When will the debt ceiling be reached?
Technically, it was reached in May but Timothy Geithner, the US Treasury Secretary, created an additional 11 weeks of wriggle room by moving assets and debt around. The White House says that there will be no more wriggle room beyond August 2, but as of last night the possibility remained that the deadline would be extended by a day or two to allow the agreement to be ironed out.
Who are the winners and losers in all this?
There are no immediate winners. To most voters, Washington has been exposed as divided and inept. The US stock markets have taken a bad hit and even if a deal is reached, confidence in the US economy has been undermined by the political debacle, so ordinary Americans could lose out too.
What will be the effects on the 2012 election?
Tea Party Republicans can look their electorates in the eye and say they kept their promise to control spending, so boosting their prospects. Mr Obama has appeared weak and done his chances of a second term no good at all.