US Government shutdown: Two days from economic disaster As the shutdown enters its third week the US is two days from economic default. Picture: AP Photo J. Scott Applewhite. That's how much time is left for politicians to work out a deal to raise the borrowing limit and avoid an unprecedented US debt default. The deadline looms as the government shutdown enters its third week and negotiations move to the Senate, after a political gridlock in the House of Representatives. Here's the latest on the US situation Democrat Senate majority leader Harry Reid and Republican leader Mitch McConnell have now taken centre stage in the negotiations as talks moved to the Senate after a deadlock in the House of Representatives. Overnight, the pair met to discuss raising the $16.7 trillion debt limit until at least mid-February and reopening the government with enough funds to operate until mid-January. President Barack Obama has also postponed an important meeting to let their talks continue. Earlier this week Mr Reid said he was "optimistic" they would reach a "reasonable" agreement, while Republican leader Mr McConnell called the talks "constructive exchanges." No solution has been reached yet, but President Obama also sounds optimistic. "My hope is that a spirit of cooperation will move us forward over the next few hours," he said while volunteering at a soup kitchen. Although he also added a swipe at Republicans saying if they don't set aside partisan concerns "we stand a good chance of defaulting." President Obama volunteers at a soup kitchen as the shutdown crisis continues. Picture: Saul Loeb Source: AFP What does it mean for the markets? The looming debt ceiling is casting a long shadow over financial markets around the world, which have shown extraordinary volatility in recent days depending on the mood in Washington. On Monday, the US Dow Jones turned a 100 point loss into a 64 point gain amid signs a deal might be reached, while the S&P 500 and Nasdaq also closed slightly higher. The Australian dollar jumped to a one-month high this morning of just above 95US cents on news a resolution could be in sight. CommSec's chief economist Craig James said despite the prospect of an "unthinkable" default, markets are currently showing signs of optimism the issue will be resolved. They can do it the easy way or the hard way. The easy way is to conclude over the next day, the hard way is to push into default and push turmoil into markets. If [talks] do get successfully concluded its positive for global economic growth and commodity producers like Australia. If we have the other side and the unthinkable happened it would be a sign of short-term dislocation ... That would really force [politicians] hand," he said. Markets have been volatile during the shutdown talks in Washington. Picture: AP Photo, Richard Drew. Treasurer Joe Hockey - in Washington to meet with the World Bank (WB) and the International Monetary Fund (IMF) - said the Australian government had plans to deal with the fallout of a US default, although the prospect still seemed "inconceivable." "Certainly we have back-pocket plans to deal with whatever arises over the next few weeks as a result of negotiations," he told CNBC. Mr James said the Australian economy was well placed in the event of a default, with room for manoeuvre on interest rates. "The Reserve Bank is well placed to support peoples confidence and certainly central banks around the world would have some plans in place," he said. If you had a situation where you have the default and it still wasn't resolved it does put a brake on economic momentum ... If you stop the economy dead and people stop spending, investing and employing, you want to avoid that happening. Senate Majority Leader Harry Reid is one of the main players in the shutdown negotiations. Picture: Mark Wilson, Getty Images, AFP Source: AFP Politicians under pressure Political leaders in the US are under pressure from all sides to provide a solution. Treasury Secretary Jack Lew, the President and a huge range of politicians, Wall St executives and economists have warned of the disastrous consequences a default could have on the domestic and global economy. IMF managing director Christine Lagarde warned of "a risk of tipping, yet again, into recession" after the fitful recovery from 2008. World Bank chief Jim Yong Kim also issued a public warning the US was close to a very "dangerous moment" earlier in the week. A protester demonstrates in front of the White House demanding an end to the shutdown. Picture: AFP Photo, Jewel Samad. What happens on October 17? The US government actually reached its borrowing limit in May, but Treasury Secretary Jack Lew has been using "extraordinary measures" to keep them afloat until now. However, if the debt ceiling is not raised by October 17 Treasury will be forced to rely on cash on hand and income taxes to pay its bills, which is not enough to cover all government spending. The $30 billion in the coffers is expected to last until sometime between October 22 and November 1, after which time the government will have to start prioritising payments - deciding which bills to pay and which to leave - or default on some of its debt obligations. To find a resolution, Republicans and Democrats will need to pass legislation through the Senate and House, getting through a large faction of Tea Party sympathisers, including Ted Cruz, who have so far forced the government into a shutdown. Read more on the debt ceiling here Do you think the debt ceiling will be raised before the deadline?