President Obama has locked top Republicans and Democrats in a room to try and hammer out a deal to cut the U.S. deficit and raise the U.S. Treasury’s borrowing authority by Aug. 2. If the government is unable to borrow more money it may not be able to pay interest on its debt — and a string of bills from doctor’s bills to army wages.
Q: How real is the Aug. 2 deadline?
A: U.S. Treasury Secretary Timothy Geithner set the current deadline for the United States to either raise its US$14.3-million debt ceiling or default on its obligations in May, after making and extending a handful of others earlier in the year.
Unlike previous deadlines, “This August/early August deadline is fairly firm,” says Tom Porcelli, chief U.S. economist at RBC Capital Markets in New York.
Yet, with Treasury officials reportedly meeting in secret this week to come up with possible contingency plans, Mr. Porcelli said an extension of sorts may be in the cards.
“I think you cannot rule other the possibility that the folks in D.C. invent another accounting gimmick to buy more time,” he said, pointing to a past move to tap into government funds to stave off default.
“I think you cannot rule other the possibility that the folks in D.C. invent another accounting gimmick to buy more time,” he said, pointing to a past move to tap into government funds to stave off default.
“It was definitely a novel approach at the time. I don’t think such novelty can be ruled out right now.”
Q: What if they miss the deadline by a few days?
A: If talks drag on but are still close and lawmakers look set to raise the debt ceiling within a few days, a temporary reprieve may be possible. Markets would likely drop but ratings agencies like Moody’s Investors Service might hold off on a downgrade for a few days.
But the grace period would not be long. Mr. Geithner started warning Congress about this in January, and a failure to find a solution would raise serious red flags with China and other major creditors.
Q: What are the major sticking points in the negotiations?
A: In earlier sessions, negotiators identified roughly US$2-trillion in spending cuts that could form the basis of a deal. Republicans walked out of those talks after Democrats called for an additional US$400-billion in budget savings by ending a range of tax breaks that benefit wealthy people and certain businesses, like the oil and gas industry. On Wednesday, the two Republicans who were involved in those talks indicated that they could accept some “revenue raisers” in a deal. And indicating that even more ambitious plans may be afoot, Democrats said Mr. Obama will push negotiators to double their target to US$4-trillion in budget savings over 10 years.
Q: What will the government cut if the deadline passes?
A: Analysts say the U.S. Treasury will have no choice but to pay interest on the debt first and then make decisions about what to pay next.
Averaged out through August, 44% of bills and obligations could not be paid, making it impossible to avoid deep cuts to popular programs, according to the Bipartisan Policy Centre, a Washington think-tank.
“Remember where the bulk of spending rests. It would almost necessarily have to come from reductions in either Social Security, Medicare, national defence — basically in the so-called income-security categories,” Mr. Porcelli said, noting that bills would start to go unpaid “in short order,” after the default.
“There’s obviously a lot of sensitivity to those items on both sides of the aisle,” he said, predicting many lost votes if politicians allow it to get to that point.
Q: Would it really be all that bad?
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