Tags: debt | ceiling | high | wire

US Debt Ceiling Debate a Dangerous High-Wire Act

Tuesday, 03 May 2011 04:23 PM

 

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It has been raised nearly 80 times since 1960, often after political grandstanding by lawmakers on Capitol Hill.

Despite rhetoric and partisan point-scoring, in the past both Republicans and Democrats have accepted they had no choice but to raise the cap on how much the government can borrow, and mustered the votes to do so.

This time could be different.

With Congress back this week from a spring recess, the battle resumes over whether to raise the United States' $14.3 trillion debt ceiling. Negotiations are expected to stretch into the summer, leaving markets jittery.

With a fragile economic recovery, opposition from lawmakers backed by the conservative Tea Party movement to increased borrowing, and a hyper-partisan Washington heading into election season, some fear a protracted fight over the borrowing limit could trigger another economic crisis.

"We are walking on eggshells," said Robert F. Wescott, president of Keybridge Research, which advises Fortune 500 companies on political and economic strategy.

"The markets are nervous. The economy is still getting its feet under it. One wrong word from a debt ceiling negotiator could produce a snowball effect in the markets -- and when it leaves, confidence leaves with the cavalry."

Treasury Secretary Timothy Geithner said Monday he would begin to take extraordinary measures this week to stave off a potential U.S. government default. He predicts the debt limit will be breached next week, on May 16.

Geithner said he could avoid default until Aug. 2, but repeated his warning that a failure to raise the borrowing cap would have a "catastrophic" impact on the economy. And for the first time, he acknowledged that it could take weeks for Congress to vote on the issue.

If the debt ceiling is not raised, investors may fear that the United States could not repay its loans and so would sell U.S. government bonds. That would drive down bond prices and force the United States to offer higher interest rates to make its debt more attractive to lenders -- a move that would lead to a dangerous spike in interest rates throughout the economy.

Geithner, along with a coalition of Wall Street banks, manufacturers and business groups, have been engaged for weeks in an intense lobbying campaign to persuade Republicans to back a borrowing limit increase, and to do it quickly.

But hopes of a early vote are fading.

While Republican and Democratic leaders still believe a deal will eventually be reached, there are so many complications that nobody knows how an agreement will be struck or what it will look like.

"There are many moving parts, all of these wheels are spinning," said Stephen Hess, a senior fellow in governance studies at the Brookings Institution think tank in Washington.

"The question is getting from here to there -- and sometimes it's a lot more painful. Ultimately, it comes to a point where they've got to reach a deal. If they don't, it would be an incredible indictment of America's claim to be a serious power."

 

VOTERS OPPOSE RAISING LIMIT

The debt limit was first set in 1917 so the government could fund military operations in World War One without repeatedly having to ask Congress for appropriations. Since 1960, it has been raised 78 times, about once every eight months, according to the U.S. Treasury website.

It hit $1 trillion in 1982, when the ratio of debt ceiling to GDP was just over 30 percent. Today, that ratio has risen to 95 percent.

As a result, the issue of government borrowing and debt has become a central issue on Capitol Hill, and in the minds of voters. Recent polls show two-thirds of Americans do not want the borrowing cap raised.

That has emboldened Republicans to demand major concessions from Democrats, insisting that any vote to raise the debt limit must include a concrete plan to slash the long-term deficit -- without raising taxes.

Democrats insist that increased taxes on the wealthy must be part of a plan to reduce the deficit, which is expected to reach $1.4 trillion this year.

"It's a huge philosophical debate -- with both sides believing in completely different philosophies," said Bob Auwaerter, head of fixed income at the giant mutual fund firm Vanguard Group.

The negotiations also are volatile because neither the Republican or Democratic leadership have firm control over their own caucuses.

In the House, Speaker John Boehner must contend with a rebellious Tea Party faction, many of whom oppose raising the debt limit under any circumstances.

House liberals fiercely object to Republican demands that a debt ceiling vote be linked to major cuts in entitlement programs such as Medicare, the government-funded health program for the elderly.

"The Republicans want to hold programs like Medicare hostage to a debt ceiling vote," Jim McGovern, a Democrat, told Reuters. He predicted many Democrats will refuse to back a debt limit raise if part of a deal includes cuts to entitlements.

A bipartisan group of senators known as the "Gang of Six" is striving to reach a long-term deficit reduction deal after five months of secret meetings. If the three Republicans and three Democrats can reach a compromise, many hope it can form the basis for agreement on a borrowing limit vote.

If they fail, a debt deal will be even harder to reach.

Former Senator Alan Simpson, the Republican co-chair of President Barack Obama's deficit-reduction commission, said forging a bipartisan deal in the current atmosphere in Washington was difficult.

"Pray for the Gang of Six," he said.

© 2014 Thomson/Reuters. All rights reserved.

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