What Is Debt Ceiling?

Will Uncle Sam blow his top?

The scariest thing about the Oct 17 deadline to raise the US government's borrowing limit: No one knows what will happen. But it could be bad news. Here is an attempt to answer some basic questions


WHAT IS THE DEBT CEILING?

The US Congress has long set an upper limit on the amount of money that the US can borrow by selling treasury bonds.

   That cap has been raised many times because the government spends more than it makes. Most recently, in August 2011, Congress voted to raise the limit to US$16.7 trillion.


WHAT HAPPEN ON OCT 17?

US Treasury Secretary Jacob J.Lew has said that on that day, the department will run out of tricks to stay under the debt ceiling, making it impossible to borrow any more money. He estimates that on Oct 17, the government would have US$30 billion on hand, indicating a daily expenditure of up to US$60 billion.


WHAT WOULD THE TREASURY DO THEN?

Many experts think that to avoid a default, Treasury would make debt repayments its top pripority. The House has approved a bill to require such "prioritisation" but the Senate has not passed it. And President Barack Obama has threatened to veto it.


WHAT ELSE COULD THE TREASURY DO?

It could make its interest payments first, then delay all other payments until it collects enough tax revenue to make a full day's payments. That would avoid choosing among competing obligations.


WILL INVESTORS EVENTUALLY PANIC?

The markets could turn south in the days before Oct 17, if the government is still partially shut down and no sign of a resolution of the debt limit seems near. Many investors would likely dump treasury holdings. "There would be a rush to the door," predicts Bipartisan Policy Center analyst Steve Bell.


WHAT ECONOMIC IMPACT WOULD THESE HAVE?

Many foresee a nightmare.

   No longer able to borrow, the US government could spend only from its revenue from taxes and fees. Household wealth would shrink. Consumer confidence could plunge. Higher rates on government debt would raise other borrowing costs, including mortgage rates.


IS WALL STREET BETTING THAT THE US WILL DEFAULT?

When investors believe a default is likely, the stock market will almost certainly plunge.

   So far, the markets have suggested that Congress will ultimately come to an agreement, but the mood is growing darker.


HAVE WE REACHED THIS POINT BEFORE?

In 2011, Republicans hesitated to lift the debt ceiling until the last minute but ultimately relented. In 1979, there was a similar standoff. The Treasury Department accidentally failed to make one interest payment. But the government has never knowingly failed to fulfil its financial obligations.


US$1.27 trillion

The amount China holds in US Treasury bonds, second only to Japan


US$3.4 trillion

US Federal Reserve's assets


US$30 billion

Cash in hand with the US Treasury on Oct 17


70%

Disapproval ratings for Republicans, up from 63 per cent


51%

US President Barack Obama's disapproval rating.


350,000

Number of furloughed US federal workforce headed back to work


SOURCE: New York Times, AP

Obama rejects Republican proposal

Short-term steps would mean flirting with debt default in the middle of shopping season

Washington - Urgent negotiations to end a partial United States government shutdown and head off an unprecedented default shifted to Senate proposals after the White House rejected ideas proposed by Republicans in the House of Representatives, Republican law-makers said.

   House Speaker John Boehner told fellow Republicans that US President Barack Obama had rejected his latest fiscal offer, said Representative Raul Labrador, an Idaho Republican.

   The Speaker also told members that talks are continuing with the White House, according to another person who sought anonymity to discuss the private meeting.

   The House Republican leaders' plan would extend US borrowing authority to Nov 22 from Oct 17 and make some changes to President Obama's health-care law, structured in a way that could meet the political needs of each side to claim success.

   But Mr Obama yesterday said he was opposed to a proposal to extend for just weeks the country's authority to borrow money.

   "It wouldn't be wise, as some suggest, to just kick the debt ceiling can down the road for a couple of months, and flirt with a first-ever intentional default right in the middle of the holiday season," he said in his weekly radio and video address. Damage "to America's sterling credit rating wouldn't just cause global markets to go haywire; it would become more expensive for everyone in America to borrow money".

   Many House members were heading to their districts, having been informed that there would be no votes later yesterday, today or before tomorrow evening.

   However, Representative Pete Sessions, a senior House Republican, said that in the coming days, a new proposal would be put forth.

   Senate Democrats on the other side of the Capitol, however, were hoping to hold a test vote yesterday on their plan, which would push the next debt-limit fight into 2015 and includes no policy conditions.

   A vote that draws support from some Senate Republicans, who have said they are dissatisfied with the brinkmanship of House Republicans, may increase pressure on Mr Boehner.

   House Democrats also said yesterday they would try to use a procedural move known as a discharge petition to force a vote on a Bill to end the shutdown without policy conditions.

   The move is a long shot; it would require Republicans who support it to break with Mr Boehner in ways they haven't on other procedural matters.

   "We know the votes are there," Maryland Representative Chris Van Hollen, the top Democrat on the Budget Committee, told reporters. "Let's vote to open the government now."

Reuters, Bloomberg, AFP

Obama hails Bill ending US govt shutdown

But deal is a temporary fix; 16-day impasse takes $30b out of economy

Vice-President Joe Biden greets Environmental Protection Agency workers in Washington with muffins as they return to work after 16 days.

WASHINGTON - Hundreds of thousands of federal staff began returning to work in the United States after chastened lawmakers finally agreed in a late-night vote to lift the country's debt ceiling and reopen federal agencies shut for 16 days by a damaging political impasse.

   A compromise Bill passed by wide margins - 81-18 in the Democratic-led Senate, followed by a 285-144 vote in the Republican-controlled House - allows the US to avoid default and ends the shutdown that began on Oct 1 and which has taken US$24 billion out of the US economy.

   President Barack Obama signed the Bill just after midnight yesterday. The focus now shifts to a new series of deadlines - the first for budget negotiations with a Dec 13 target - that sets up more rounds of political combat over taxes and spending on programmes, including Social Security and Medicare.

   The deal funds the government at Republican-backed spending levels only until Jan 15 and suspends the debt limit until Feb 7.

   Mr Obama hailed the legislation - which adhered strictly to terms he laid down when the twin crises erupted more than three weeks ago.

   "We'll begin reopening over government immediately and we can begin to lift this cloud of uncertainty from our businesses and the American people," he said.

   Republican House of Representatives Speaker John Boehner said: "We fought the good fight. We just didn't win."

   US stocks had surged on the prospect of an end to the crisis on Wednesday but opened sharply lower yesterday as investors turned their attention to corporate earnings.

   Five minutes into trading, the Dow Jones Industrial Average dropped 124.71 points, or 0.81 per cent, to 15,249.12. The broader S&P 500 lost 6.79 (0.39 per cent) at 1,714.75, and the tech-rich Nasdaq Composite fell 15.79 (0.41 per cent) to 3,823.64.

   World markets had priced in the expected deal and largely shrugged off the news, falling in Europe and mostly rising in Asia yesterday. But many commentators suggested its short-term nature only exacerbated the considerable damage to Washington.

   In an interview with NBC News, Republican John McCain admitted: "We have damaged our credibility very badly."

   House Republicans sparked the crisis 16 days earlier when they refused to fund the government unless Mr Obama agreed to defund or delay his health-care law, known as Obamacare. They later refused to raise the government's borrowing authority to pay its bills, raising the spectre of a global catastrophe.

   Mr Boehner, in a bold move, ended up putting the compromise Bill to a vote in the House just hours before the debt deadline, knowing most Republicans did not support it, Its passage brought relief worldwide.

   The Foreign Ministry in China, the largest foreign holder of US Treasury bills, welcomed it. But the official Xinhua news agency slammed US politicians for holding the world hostage and described the deal as "no more than prolonging the fuse of the US debt bomb one inch longer".

   There was little immediate reaction from Japan, India, Malaysia, Thailand or Taiwan. But Indonesia's Coordinating Economics Minister Hatt Rajasa expressed relief on the sidelines of a trade exhibition in Jakarta, telling reporters: "It gives a positive push to local currencies of the developing countries, including Indonesia."

ASSOCIATED PRESS, AGENCE FRANCE-PRESSE, REUTERS, BLOOMBERG

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>>4

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