US reaches debt limit: What comes next?
US government has reached the debt limit set by Congress, Treasury's Tim Geithner said Monday. Treasury has ways to keep paying the nation's bills until August. All eyes are now on Congress.
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One thing the cap doesn't do, however, is automatically reduce federal spending or balance the federal books. In recent polls, Americans have said they don't want the debt limit to be raised. But Congress has authorized spending that exceeds the government's tax revenues. And many voters resist the idea of either deep cuts in existing federal programs or higher taxes.Skip to next paragraph
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Until that equation changes, the Treasury will have to borrow money – and being up against the debt ceiling is an obstacle to doing that.
Moreover, many finance experts warn that even approaching the brink of default on Treasury debt could have serious consequences. Investors, they say, could start viewing Treasury bonds less as a "risk free" haven and more like any other investment. The result could be a weaker US dollar and higher interest rates, not just for federal borrowing but also for everything from mortgages to business loans.
"At the present time, financial markets are not spooked, there is relative calm," economist Asha Bangalore of the Northern Trust Co. wrote in a Friday analysis. "As the August deadline approaches, uncertainty would translate into significant financial market volatility."
If Congress refused to raise the limit, the Treasury Department "would have to operate on a cash flow basis and may have to prioritize its payments," Ms. Bangalore said.
Many political conservatives argue that talk of a US debt default is overblown. The Treasury would, presumably, put highest priority on avoiding missed payments to creditors. And the showdown can provide the impetus for a needed downsizing of federal programs, say critics of big government.
But without the authority to borrow, the Treasury secretary knows that incoming cash would cover less than two-thirds of federal spending at current rates. The Treasury's options could quickly get tough, going beyond things like furloughing federal employees deemed nonessential. Even many supporters of big spending cuts say the ceiling on debt should be raised, as long as the move is paired with mechanisms to ensure new reins on the federal budget.
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