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Clock starts ticking as US hits limit on federal borrowing

By Paul Wiseman
Associated Press / May 17, 2011

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WASHINGTON — The United States reached its $14.3 trillion limit on federal borrowing yesterday, leaving Congress 11 weeks to raise the threshold or risk a financial panic or another recession.

Treasury Secretary Timothy Geithner formally notified Congress that the government would halt its investments in two federal pension plans so it will not exceed the borrowing limit.

Geithner said the government could get by with bookkeeping maneuvers like that through Aug. 2. After that, the government could default on its debt for the first time, threatening the national credit rating and the dollar.

Geithner sent Congress a letter saying he would be unable to make the pension investments in full. He urged Congress to raise the debt limit “in order to protect the full faith and credit of the United States and avoid catastrophic economic consequences for citizens.’’

Republican leaders in the House have said they will not raise the debt limit unless the Obama administration first agrees to big spending cuts or to steps to lower the debt over the long run.

House Speaker John Boehner repeated the pledge in a statement. The statement did not address Geithner’s warning about what would happen if the limit were not raised.

“Americans understand we simply can’t keep spending money we don’t have,’’ Boehner said. “There will be no debt limit increase without serious budget reforms and significant spending cuts.’’

Republicans have also ruled out tax increases, including any plans to end tax cuts for high earners enacted in 2001 and 2003.

“We need to have a vote to lift the debt ceiling because the consequences of not doing so would be quite serious,’’ White House spokesman Jay Carney told reporters. “And those who suggest otherwise are whistling past the graveyard.’’

If it does not raise the limit, Congress would have to come up with $738 billion to make up for what it planned to borrow through the end of the fiscal year on Sept. 30. The options are drastic: Cut 40 percent of the budget through September, which might mean defaulting on payments to investors in government bonds; raise taxes immediately; or some combination of the two.

“In the economic area, this is the equivalent of nuclear war,’’ says Edward Knight, who was the Treasury Department’s general counsel during a standoff over the debt ceiling in the mid-1990s.

Congress created the debt limit, a ceiling on how much debt the government can pile up, in 1917. It is unique to the United States. Most countries let their debts rise automatically when government spending outpaces tax revenue. Raising the debt ceiling does not usually create much of a stir. Congress has raised it 10 times since 2001.

A refusal to raise the debt ceiling would not mean that Congress had begun to solve the budget problems. It would just mean that lawmakers were refusing to let the government borrow more money to finance programs and tax cuts already approved.

“Having voted to run up the bill, it is utterly irresponsible to prohibit the government from borrowing the money to pay it,’’ writes Howard Gleckman of the Urban Institute.

The most serious debt-ceiling showdown was in 1995. At the time, the debt limit was just $4.9 trillion. Treasury Secretary Robert Rubin juggled the books to keep government finances afloat for four and a half months before Congress and the Clinton White House reached a deal.

Geithner’s Treasury Department will not have as much cushion because the debt is growing much faster than in the mid-1990s. If Congress fails to act before then, the repercussions would be severe.

“When bills became due, we could not pay all of them,’’ said Maya MacGuineas of the Committee for a Responsible Budget, a bipartisan group that advocates cutting the debt. “If that happens, you shake up markets as you’ve never seen before. . . . It’s inconceivable we would willingly walk ourselves over the cliff.’’