US stock markets fell sharply on Monday as deadlock in Congress appeared increasingly likely to lead to the first partial shutdown of the federal government in almost two decades.
The Dow Jones Industrial Average lost close to 140 points as the markets opened (0.91%) and the S&P 500 and Nasdaq exchanges were all down close to 1% in early trading before recovering slightly.
The Democrat-controlled Senate was expected to vote later on Monday on a resolution passed in the early hours of Sunday morning by the Republican-dominated House of Representatives, which makes funding the government until the middle of December contingent upon a one-year delay of the Affordable Care Act. It also strips the new healthcare law, which is due to come into force on Tuesday, of a key tax on medical devices.
Senators are likely to strip the bill of the Obamacare riders, sending a "clean" version back to the House later.
The game of Congressional ping-pong may then speed up considerably if the House chooses to follow through on a proposed threat to attach one last Obamacare rider to the continuing resolution.
This threat, based on an amendment originally suggested by Republican senator David Vitter, would prevent lawmakers and their staff from enjoying a healthcare subsidy under the Affordable Care Act. If that passes the House, it would then be sent back to the Senate a third time.
John Boehner, the House speaker, calculates that senators would find it hard to block a budget resolution that contained only this rider relating to Obamacare, as they would risk being seen to precipitate a government shutdown in order to protect their own perks.
But House conservatives have consistently blocked Boehner's tactics in recent days, and may want to push for the House to take a harder line and pass a resolution that would more fully dismantle the healthcare law.
Either way, Reid and Obama – who have insisted they will only pass a clean budget resolution – are likely to stand their ground, believing that US public opinion will continue to largely blame Republicans for the predicament. Obama has stepped up his rhetoric in recent days, accusing the Republicans of holding the government to ransom over a law that has nothing to do with the budget, and that has already been passed by both branches of Congress.
Even Republicans in the Senate have criticised the tactics of their House colleagues. John McCain, the former Republican presidential candidate, said that members of Congress should accept they lost the legislative fight over the Affordable Care Act two years ago.
If a deal is not reached on Monday, the shutdown would begin at midnight and affect all federal employees not deemed to be "essential" by the White House office of budget management.
Asked if he thought a shutdown was now inevitable, Richard Durbin, the second most senior Democrat in the Senate, said on Sunday: "I'm afraid I do."
Durbin told CBS's Face the Nation that he was open to negotiating over the tax on medical devices, "but not with a gun to my head, not with the prospect of shutting down the government".
Jack Ablin, chief investment officer at BMO private bank, said on Monday that the row was likely to have serious consequences for the wider economy.
"This is a contrived crisis that is going to have real consequences," said Ablin. "It will cause unnecessary volatility in the market and ultimately cost the economy."
He said the government shutdown would lead to work for private business and cause others to put off doing business and hiring. The consequences of a failure to reach agreement over the debt ceiling would be far worse, said Ablin.
"In 2011 we didn't end up with a government shutdown but we still lost 1% of GDP that quarter and the stock markets dipped 16%," he said.
In a note to investors, Eurasia analysts Dean West and David Gordon said they were hopeful that a deal would still be done but the chances of a closure had risen over the weekend: "The direct cost of a shutdown to the economy would be minimal, but there are two important indirect implications. First, markets have long been able to hang hope on last-minute congressional deals that avert the real economic catastrophes Washington seems to threaten every few months.
"That politics is no longer simply a noisy sideshow but rather a real risk with real consequences could well have some effect on market and economic confidence. This effect will be greater if Congress can't find a way out of shutdown for an extended period."
Even if a deal is done over the budget, a more serious crisis looms as Congress begins negotiations over raising the US's $16.7tn borrowing limit. Without an agreement, treasury secretary Jack Lew has warned that the Federal government will run out of money by 17 October and be unable to meet most of its obligations.The last row over the debt ceiling in 2011 led to a downgrade of US debt and panic on stock markets worldwide.
(c) 2013 Guardian Newspapers Limited.
Original headline: US stock markets fall sharply as deadlock over shutdown intensifies
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