U.S. Debt Cap Worries As Government Shuts Down
Washington (AFP) – Fears were mounting Wednesday that a fight over the government’s debt ceiling will overtake the budget battle that has paralyzed Washington, threatening to trigger an unprecedented US default.
Republican lawmakers, frustrated that they have not won any concessions from Democrats over health care reform, have threatened to roll the two issues together.
That signalled not only that the government shutdown could run for two weeks, but also that there could be a battle to the brink over the borrowing limit that would frighten global markets.
Showing the same concern, the U.S. Treasury Secretary Jacob Lew warned again Tuesday that the government will run out of money by October 17, placing it in a position of reneging on payments.
With a monthly deficit of around $60 billion to address, Lew said in a letter to House Republican leader John Boehner that time is running out to raise the ceiling.
By October 17, he said, “we will be left to meet our country’s commitments at that time with only approximately $30 billion.”
“If we have insufficient cash on hand, it would be impossible for the United States of America to meet all of its obligations for the first time in our history.”
After first brushing off the shutdown as likely short-lived, analysts and investors were distinctly more worried by Wednesday, with U.S. stocks sinking around 0.4 percent in early trade.
A prolonged shutdown could put a deep dent in economic growth, while a missed payment — especially a debt payment — would rock global markets, and possibly send U.S. interest rates higher.
“The mere fact that raising the debt ceiling is being debated will have a detrimental effect on equity and bond markets through the uncertainty and risk such a debate creates,” said an analysts’ note from IHS Global Insight. “A delayed debt payment will have a notable impact on bond yields and would trigger a credit downgrade, harming economic growth.”
The shutdown came after President Barack Obama rejected moves to tie approval of government funding for the 2014 fiscal year, which began October 1, to their effort to kill Obama’s health reforms.
House Republicans’ insistence on linking the two meant no budget bill could pass the Congress, forcing the White House to shut down large parts of the federal government for lack of funds.
But their high risk, high profile effort reaped the Republicans nothing but public opprobrium, leaving them to turn to the debt ceiling to leverage some face-saving concessions from the White House.
“Now that you’ve got the shutdown, I think you’ll see the debt ceiling and this merge and move together,” Republican Senator Tom Coburn said.
House Republican Paul Ryan said: “Most budget agreements in the past have always involved debt limit increases. We think that’s the forcing mechanism.”
Obama has repeatedly said he would not be held hostage on either issue, pointing to an escalating fight.
This happened in 2011 when spending-and-debt ceiling battle went to the final minutes before a compromise was reached that averted a default but also set the stage for the current fight.
Because that battle went down to the line, days later Standard & Poor’s dealt the U.S. its first ever credit rating downgrade, cutting it from the top-grade AAA to AA+.
Sean West, U.S. director of political risk consultant Eurasia Group, said he expected the two issues to merge and continue until the October 17 deadline.
“This will all roll together, and then we potentially have a very nasty fight in the run up to the debt ceiling. … This is an ugly fight,” he said.
Yet, he said, neither Republican nor Democratic leaders want to test what happens if the country is forced to miss payments. He added: “The debt ceiling is the action-forcing event,”he said. “I continue to believe that nobody wants to go through that deadline.”
Yet many analysts fear sheer stubbornness or a “political accident” such as a miscommunication or a misunderstanding could prevent a timely deal.
Brian Rehling, a bond market specialist at Wells Fargo Advisors, said a U.S. default, even if momentary, “would likely have far-reaching implications.”
“For the bond market, an actual default even if only temporary or technical is unthinkable and considered inconceivable,” he said.
He acknowledged that because of the greenback’s leading reserve role in the global economy, markets might not have much choice but to continue buying dollar-backed US debt.
But he added: “We do not think politicians — Democrat or Republican — would be willing to find out.”