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Q&A: Why breaking federal debt limit sparks fear

First Published Oct 08 2013 10:25AM      Last Updated Oct 08 2013 10:25 am

Washington • Here’s the scariest thing about the looming deadline to raise the U.S. government’s borrowing limit: No one knows precisely what will happen if the limit is breached.

It’s never happened before.

The possible consequences are dizzyingly complex. But they’re all bad. Most ominously, the government might fail to make interest payments on its debt. Any missed payment would trigger a default.

Financial markets would sink. Banks would slash lending. Social Security checks would be delayed. Eventually, the economy would almost surely slip into another financial crisis and recession.

Even if the government managed to make its interest payments, fears about a default would likely cause investors to dump Treasurys and send U.S. borrowing rates soaring.



The financial world is holding out hope that that grim scenario will compel Congress to raise the debt limit and avert a default. Here are questions and answers about the government’s borrowing limit:

Q. What exactly is it?

A. The borrowing limit is a cap on how much debt the government can accumulate to pay its bills. The government borrows by issuing debt in the form of Treasurys, which investors buy. The government must constantly borrow because its spending has long exceeded its revenue. The first borrowing limit was enacted in 1917. Since 1962, Congress has raised the borrowing limit 77 times. It now stands at $16.7 trillion.

Q. How close are we to the limit?

A. The national debt actually reached the limit in May. Since then, Treasury Secretary Jacob Lew has made accounting moves to continue financing the government without further borrowing. But Lew says those measures will be exhausted by Oct. 17. The government will then have to pay all its bills from its cash on hand — an estimated $30 billion — and tax revenue. The cash and tax revenue aren’t likely to be enough. Lew has said the government’s daily spending can run as high as $60 billion.

Q. What happens after Oct. 17?

A. The government could pay all its bills for a few days, according to the nonpartisan Congressional Budget Office. But sometime between Oct. 22 and Oct. 31, the $30 billion would run out. The date isn’t exact because it’s impossible to foresee precisely how much revenue the government will receive and when.

Q. When it runs out of cash, does the government default?

A. No, not right away. A default would occur if the government fails to make a principal or interest payment on any of its Treasurys. A $6 billion interest payment is due Oct. 31.

Many experts think that to avoid a default, Treasury would make payments on the debt its top priority. The House has approved a bill to require such "prioritization." The Senate hasn’t passed it, though. And President Barack Obama has threatened to veto it.

In any case, making some payments and not others is harder than it might sound. Treasury makes roughly 100 million payments a month. Nearly all are automated. Without any cash in reserve, a minor glitch could cause Treasury to miss a debt payment — and default.

"Treasury would do everything in their power to not miss a debt payment," says Donald Marron, an economist at the Urban Institute and a former economic adviser to President George W. Bush. "But when you’re in untested waters under a great deal of stress, bad things happen."

Even if the government managed to stay current on its debts, it would fall behind on other bills. These include Social Security benefits, federal employees’ pay and payments to contractors.

 

 

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