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Government shutdown: Default now focus, as Treasury warns of 'catastrophe' (+video)

On Day 3 of government shutdown, Democrats and Republicans shift the conversation to the looming debt limit, as chances grow that both issues will be resolved together.

By Staff writer / October 3, 2013

President Obama speaks about the government shutdown and debt ceiling during a visit to M. Luis Construction, which specializes in asphalt manufacturing, concrete paving, and roadway reconstruction, Thursday, Oct. 3, 2013, in Rockville, Md.

Charles Dharapak/AP

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Washington

With no resolution in sight to the government shutdown, Washington policymakers in both parties are looking ahead to a far more consequential deadline: the Oct. 17 debt limit.

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If Congress does not raise the ceiling on government borrowing authority beyond $16.7 trillion by that date, the United States would soon head toward a historic default on its debt payments, risking a global economic crisis.

But that threat may be the bludgeon required to move Washington off the budget stalemate that closed parts of the federal government on Tuesday, analysts say.

On Thursday, the Treasury Department raised warning flags about engaging in debt-ceiling brinkmanship.

“A default would be unprecedented and has the potential to be catastrophic,” Treasury said in a six-page report. “Credit markets could freeze, the value of the dollar could plummet, US interest rates could skyrocket, 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.”

Just getting close to breaching the debt ceiling creates uncertainty in the debt markets and raises borrowing costs, Treasury warns. After the 2011 debt ceiling near-breach, Standard & Poor’s lowered the US credit rating below AAA for the first time.

President Obama reinforced the Treasury message in a speech at a construction company in Rockville, Md., Thursday morning, saying the economy – not just the government – would shut down if the federal government could not borrow any more money.  

“As reckless as a government shutdown is, as many people as are being hurt by a government shutdown, an economic shutdown that results from default would be dramatically worse,” Mr. Obama said. 

House Speaker John Boehner has told Republican colleagues that he will not let the nation go into default, even if it means passing debt-ceiling legislation without a majority of Republican votes, The New York Times reported Thursday. 

As the government shutdown was getting under way early this week, House Republican leaders already had their eyes on the debt limit as the real driver of a resolution. According to multiple news reports, Speaker Boehner and his top deputies on fiscal matters are reviving talk of a “grand bargain” that combines a shutdown-ending budget deal and a debt ceiling increase, plus elements of some or all of the following: reform of entitlement programs, tax reform, fixes to the Affordable Care Act (ACA), and changes to the “sequester,” the automatic across-the-board spending cuts that began in March.

With just two weeks to go until Oct. 17, working out such a major deal may be well nigh impossible. Democrats continue to reject the idea of negotiating over government funding and the debt limit, or making any concessions on the funding and timing of ACA implementation. But no matter what the resolution ends up being on the budget impasse, big or small, the main impetus will be the looming deadline on the debt ceiling, both sides suggest.  

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