US moves a step closer to debt default

The United States has moved closer to the possibility of the first-ever default on the government’s debt as Speaker John Boehner adamantly ruled out a House vote on a straightforward bill to boost the borrowing authority without concessions from President Barack Obama.

US moves a step closer to debt default

The United States has moved closer to the possibility of the first-ever default on the government’s debt as Speaker John Boehner adamantly ruled out a House vote on a straightforward bill to boost the borrowing authority without concessions from President Barack Obama.

With no resolution in sight, US Treasury secretary Jack Lew yesterday warned that Congress is “playing with fire” as he called on lawmakers to quickly pass legislation reopening the government and a measure increasing the nation’s $16.7trn debt limit.

The government shutdown precipitated by the budget brinkmanship entered its sixth day with hundreds of thousands of federal employees furloughed, national parks closed and an array of government services on hold.

Mr Lew said Mr Obama has not changed his opposition to coupling a bill to reopen the government and raise the borrowing authority with Republican demands for changes in the three-year-old health care law and spending cuts.

Mr Boehner insisted that Mr Obama must negotiate if the president wants to end the shutdown and avert a default that could trigger a financial crisis and recession that would echo the events of 2008 or worse. The 2008 financial crisis pushed the country into the worst recession since the Great Depression of the 1930s.

“We’re not going to pass a clean debt limit increase,” Mr Boehner, the top House Republican, said in a television interview. “I told the president, there’s no way we’re going to pass one. The votes are not in the House to pass a clean debt limit, and the president is risking default by not having a conversation with us.”

Mr Boehner also said he lacks the votes “to pass a clean CR”, or continuing resolution, a reference to the temporary spending bill without conditions that would keep the government operating. Democrats argue that their 200 members in the House of Representatives plus close to two dozen pragmatic Republicans would back a so-called clean bill if Mr Boehner just allowed a vote, but say he remains hamstrung by the hardcore conservative tea party caucus.

“Let me issue him a friendly challenge. Put it on the floor Monday or Tuesday. I would bet there are the votes to pass it,” said Democratic Senator Chuck Schumer.

In a series of Sunday television appearances, Mr Lew warned that on October 17, when he exhausts the bookkeeping manoeuvres he has been using to keep borrowing, the threat of default would be imminent.

“I’m telling you that on the 17th, we run out of the ability to borrow, and Congress is playing with fire,” Mr Lew said.

He added that while the Treasury expects to have 30 billion US dollars (£18.7 billion) of cash on hand on October 17, that money will be quickly exhausted in paying incoming bills given that the government’s payments can run up to $60bn on a single day.

The Treasury issued a report on Thursday detailing in stark terms what could happen if the government actually defaulted on its obligations to service the national debt.

“A default would be unprecedented and has the potential to be catastrophic,” the Treasury report said. “Credit markets could freeze, the value of the dollar could plummet, US interest rates could skyrocket, the negative spillovers could reverberate around the world.”

Private economists generally agree that a default on the US debt would be extremely harmful, especially if the impasse was not resolved quickly.

“If they don’t pay on the debt, that would cost us for generations to come,” said Mark Zandi, chief economist at Moody’s Analytics. He said a debt default would be a “cataclysmic” event that would roil financial markets in the United States and around the world.

Mr Zandi said that holders of US Treasury bonds would demand higher interest rates which would cost the country hundreds of billions of dollars in higher interest payments in coming years on the national debt.

Republican Senator Ted Cruz, a tea party favourite who has been a force in pushing congressional Republicans to link changes to the health care law in exchange for keeping the government running, spelled out his conditions for raising the borrowing authority.

“We should look for three things. Number one, we should look for some significant structural plan to reduce government spending. Number two, we should avoid new taxes. And number three, we should look for ways to mitigate the harms from ’Obamacare’,” Mr Cruz said, describing the debt ceiling issue as one of the “best leverage the Congress has to rein in the executive”.

Some Republicans, such as Representative Steve King of Iowa, dismiss the warnings about a government default as an exaggeration, suggesting US credit will not collapse and calling the talk “a lot of false demagoguery”.

Asked how the standoff might end, Mr Boehner said yesterday on ABC that he was uncertain: “If I knew, I’d tell you.” He added that Mr Obama can call him any time to start negotiations to end the shutdown. “He knows what my phone number is.”

Privately, administration officials say they do not think Mr Boehner and Senate Republican leader Mitch McConnell want a default as they realise it will be far worse than a shutdown, but the two do not know how to avoid it or when to try.

In one promising development, several hundred thousand furloughed federal employees will head back to work from today, and those who remain at home or are working without pay cheques are a step closer to getting back pay once the partial government shutdown ends.

Defence secretary Chuck Hagel ordered nearly all of the 350,000 furloughed Pentagon civilian employees back on the job. Mr Hagel said he based his decision on a Pentagon interpretation of a law called the Pay Our Military Act that was approved by Congress just before the start of the partial government shutdown.

The Senate will try to vote this week on a bill that passed the House unanimously on Saturday to pay federal workers for days missed due to the shutdown.

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