As the United States faces the startling possibility of defaulting on its debts, Republicans and Democrats failed to agree Sunday on spending cuts, which puts in question lawmakers' efforts to up the country's debt ceiling in order to avoid an economic catastrophe.
The debt ceiling is currently capped at $14.3 trillion. If the debt crisis continues, the U.S. Treasury reaches a point in which it can't borrow the money it needs to run the country
What is it?
The United States debt crisis centres around the possibility that the government could default, meaning it may not be able to pay all its bills. That includes interest and principal on Treasury bonds, Social Security cheques to retirees and payments to government contractors.
The government has managed to avoid default for weeks by using what the Treasury describes as "extraordinary measures to create additional headroom under the debt limit."
A default would be an unprecedented event in American history.
When is the deadline?
The deadline for the American government to come up with a solution to the debt crisis is August 2. The U.S. Treasury believes a default could proceed after that date.
How did we get here?
The U.S. government reached its current $14.3 trillion borrowing limit several weeks ago and Treasury officials have been relying on accounting manoeuvres to continue to pay the nation's bills without additional borrowing.
Officials have said that the government normally borrows about $125 billion a month to finance operations.
What are the options to recover/overcome it?
The debate rages on in the White House about how to solve the crisis. On Saturday, lawmakers were looking at plan that would boost the debt limit by roughly $1 trillion, enough to last through this year. The plan also involves locking in slightly more spending cuts.
Another package combining trillions more in savings and another extension of the debt limit would be considered later.
The president is calling for a broader deal that will address the immediate debt crisis and the deficit challenges. His plan involves cutting spending and raising the debt ceiling.
Raising the debt ceiling would avert default and put off the debate on America's finances.
What could happen if they don't meet deadline?
If the government doesn't meet the Aug. 2 deadline, the country could be pushed back into a recession while causing chaos in the global economy.
The cost of government borrowing could rise. Americans seeking home mortgage or car loans would see interest rates climb, as would people with outstanding credit card balances. There could also be a tax increase on Americans.
The United States's economic reputation would take a major hit in the markets, resulting in creditors demanding higher interest rates and investors possibly dropping their holdings in U.S. dollars.
With files from The Associated Press
