18 Jul 2011

US debt: a week of breath-holding brinkmanship

Political leaders are deadlocked over a deal to raise America’s debt limit with President Obama warning of “Armageddon” if they don’t agree.

US debt: a week of breath-holding brinkmanship

President Obama‘s talked of “Armageddon”. To Treasury Secretary Tim Geithner – it’s “catastrophic”. The Fed chairman Ben Bernanke has warned of “calamity”. Or, in the words of senior Republican senator Lindsay Graham: “What is calamitous is the path we’re on as a nation. We’re becoming Greece.”

It’s a week of breath-holding brinkmanship over America’s debt limit – the President’s given party leaders just five days to reach an agreement to raise the country’s borrowing limit – or risk default when the current $14.3 trillion ceiling runs out on 2 August.

But despite the looming deadline – neither party looks at all willing to budge. Indeed the Republicans have shifted even further to the right – backing a Tea Party inspired “Cut, Cap and Balance” deal which demands far higher cuts in spending than the party signed up for back in April – reducing federal expenditure to just 18 per cent of GDP.

More from Channel 4 News: 'Time running out' on US debt crisis

On top of that, they would impose a constitutional amendment requiring the Government to balance its budget each year. Coupled with that – there would be strict limits on future tax legislation, limits even President Reagan might not have supported back in the 1980s. Economists say that kind of hand-tying could risk making any recession far worse, by forcing the government to slash spending or raise taxes – at a time when revenues are already falling fast.

Aren’t the parties pushing partisan politics to a rather dangerous limit?

Such an uncompromising position is hardly likely to win over the required two-thirds support in both chambers – let alone the 38 state legislatures which need to ratify it. And tonight the White House said President Obama would veto the plan, in the unlikely event that it won approval. A spokesman said the bill would “undercut the federal government’s ability to meet its core commitments to seniors, middle-class families and the most vulnerable, while reducing our ability to invest in our future”.

But aren’t the parties pushing partisan politics to a rather dangerous limit? Hardly a strategy likely to endear them to voters, many of whom are seriously worried about what the impact of a debt default might mean.

But isn’t that pushing partisan politics to a rather dangerous limit? Hardly a strategy likely to endear the warring parties to voters, many of whom are seriously worried about what the impact of a debt default might mean.

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If there’s no agreement by Friday – or by the ultimate 2 August deadline – what would that actually mean? Most economists agree it would hugely destabilise the markets and the economy – drive up the cost of borrowing and send shares plummeting.

For ordinary Americans that could mean their mortgages become more expensive. Businesses will pay more for loans. It could even put the brakes on the short-term lending market – critical for the free flow of money through the US economy and beyond. And experts say that a 1 per cent hike in interest rates could depress economic growth by almost 1 per cent – with the loss of some 800,000 jobs.

There’s also a risk for people relying on Government benefits or paychecks. On 3 August the US Treasury has to send out social security benefits worth some $23 billion. That’s $11bn higher than the revenue it will see coming in that day. Obama has already warned failure to raise the borrowing limit would leave him unable to guarantee that those payments would all be made.

More seriously, the following day is the date the Treasury has to repay the interest due on Government bonds. To the markets – bond repayment is absolutely sacrosanct – and the Treasury must make all the spending cuts it needs in order to honour it. Otherwise, in the words of one Wall Street analyst “you would start to see the basic underpinnings of the financial system come undone”. That means slashing all other Federal expenditure by some 44 per cent, according to calculations by Politico. It could leave the Government unable to send out payments to the US military, hospitals, doctors, the disabled, senior citizens – and state authorities around the country.

So despite the language of brinkmanship – party leaders recognise this is serious stuff. There’s no sign of compromise today – but they’re scrambling to come up with something that will keep their activists – and the markets – reasonably satisfied. Hence House speaker John Boehner: “What may look like something less than optimal today, if we’re unable to get to an agreement – might look pretty good a couple of weeks from now.”

Armageddon indeed. Luckily, there is a plan B.

Felicity Spector is a chief sub-editor at Channel 4 News. Follow her on Twitter @felicityspector.