US Congress ‘is playing with fire’

Congress needs to pass a debt ceiling increase by Oct 17 or the US will default, said Treasury Secretary Jacob J Lew.

US Congress ‘is playing with fire’

“Congress is playing with fire,” Lew said on CNN’s State of the Union. “If the United States government, for the first time in its history, chooses not to pay its bills on time, we will be in default, there is no option that prevents us from being in default if we don’t have enough cash.”

Lew is projecting that the US will exhaust its “extraordinary measures” to stay under the $16.7 trillion federal debt limit no later than Oct 17. By that time the US will have about $30bn in cash, which will be short of expenditures that can reach as high as $60bn in subsequent days. About 800,000 federal employees have been furloughed since Oct 1.

While House Speaker John Boehner said he doesn’t want the US to default on its debt, he also said he will reject President Barack Obama’s call for a debt-limit increase free of policy conditions.

“If we’re going to raise the amount of money we can borrow, we ought to do something about our spending problem and the lack of economic growth in our country,” he said after a meeting with House Republicans.

A week of the shutdown will probably shave 0.1 percentage point from economic growth, according to the median estimate of economists surveyed by Bloomberg News, with the costs accelerating if the closing persists. The shutdown costs at least $300m a day in lost output at the start, according to IHS Inc, a Massachusetts-based global research firm.

The consequences of a US government default caused by Congress failing to raise the debt limit could be catastrophic and might last decades, the Treasury Department said on Oct 3.

“Credit markets could freeze, the value of the dollar could plummet, US interest rates could skyrocket,” the Treasury said. “The negative spillovers could reverberate around the world, and there might be a financial crisis and recession that could echo the events of 2008 or worse.”

So far, the financial-market response to the political gridlock has been muted.

The yield on the benchmark 10-year Treasury increased two basis points last week, trading between 2.66% and 2.58%. While the yield is up from the record low of 1.38% in July 2012, it’s below the average of about 6.7% since the early 1980s, the start of the three-decade long bull market in bonds.

The dollar has appreciated about 2.48% this year, according to Bloomberg Correlated Weighted Indexes, which measures the greenback against the euro, yen, pound and six other major currencies. The measure for the dollar, while down about 3% in the past month, is still poised for its best year since gaining 15.5% in 2008.

BlackRock’s Laurence D. Fink and Pacific Investment Management’s Bill Gross said the budget standoff will be resolved without a default.

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