Belfast Telegraph

Monday 21 April 2014

White House open to debt increase

The United States has moved closer to the possibility of the first-ever default on the government's debr

The White House has signalled that it would be open to a short-term hike in the US debt limit as the United States moved a step closer to its first-ever default while a separate impasse, a partial government shutdown, entered its second week.

The shutdown, which centres on a fight over funding for President Barack Obama's new healthcare law, has pushed hundreds of thousands of workers off the job, closed national parks and museums and stopped an array of government services.

A default could have far bigger consequences. Economists say it could trigger a financial crisis and recession that would echo 2008 - or worse. The 2008 financial crisis plunged the country into the worst recession since the Great Depression of the 1930s.

Gene Sperling, a senior Obama economic adviser, reiterated a vow not to negotiate on the debt because it would sanction the threat of default as a bargaining chip and increase the chance of default in the future.

Senate Democrats are drafting legislation to raise the nation's debt limit without the type of unrelated conditions Republicans have said they intend to demand, officials said today.

A defiant John Boehner, the Republican leader of the House of Representatives, has insisted that Mr Obama must negotiate on changes to his healthcare law and spending cuts if he wants to end the shutdown and avert a default.

Mr Boehner said yesterday that he lacks the votes to pass a straight-forward temporary spending Bill that would keep the government operating.

The uncompromising talk rattled financial markets early today as stocks slumped. China, which holds 1.277 trillion US dollars (£793 billion) in US Treasury bonds and stands as the United States' biggest foreign creditor, urged that all efforts are made to avoid a default.

Mr Sperling was pressed on whether he would rule out a two or three-week extension on increasing the nation's $16.7 trillion debt limit. Treasury Secretary Jack Lew has warned that on October 17, he exhausts the bookkeeping measures he has been using to keep borrowing.

"There's no question that the longer the debt limit is extended, the greater economic certainty there will be in our economy which would be better for jobs, growth and investment," Mr Sperling told a breakfast sponsored by the newspaper Politico. "That said, it is the responsibility of Congress to decide how long and how often they want to vote on doing that."

Seeking to maintain pressure on Republicans, Mr Obama made a previously unannounced visit to the Federal Emergency Management Agency (FEMA) headquarters today to draw attention to a government agency that has had to furlough 86% of its workforce as part of the partial shutdown.

Mr Obama thanked FEMA employees for their work preparing for Tropical Storm Karen, which dissipated yesterday after posing a threat to the Gulf Coast.

The one bright spot today is a significant chunk of the furloughed federal workforce is heading back to work. Defence Secretary Chuck Hagel ordered nearly 350,000 back on the job, basing his decision on a Pentagon interpretation of a law called the Pay Our Military Act.

Those who remain at home or are working without pay are a step closer to getting back pay once the partial government shutdown ends. The Senate could act this week on the measure that passed the House unanimously on Saturday.

Democrats insist that Republicans could easily open the government if Mr Boehner simply allows a vote on the emergency spending Bill. Democrats argue that their 200 members in the House plus close to two dozen pragmatic Republicans would back such a Bill, but the Speaker remains hamstrung by conservatives.

In a series of television appearances yesterday, Mr Lew said that while the Treasury expects to have 30 billion US dollars (£18.6 billion) of cash on hand on October 17, that money will be quickly exhausted in paying incoming bills given that the government's payments can run up to 60 billion US dollars (£37.3 billion) on a single day.

Treasury issued a report on Thursday detailing in stark terms what could happen if the government actually defaulted on its obligations to service the national debt.

Private economists generally agree that a default on the US debt would be extremely harmful, especially if the impasse was not resolved quickly.

"If they don't pay on the debt, that would cost us for generations to come," said Mark Zandi, chief economist at Moody's Analytics. He said a debt default would be a "cataclysmic" event that would roil financial markets in the United States and around the world.

Mr Zandi said that holders of US Treasury bonds would demand higher interest rates which would cost the country hundreds of billions of dollars in higher interest payments in coming years on the national debt.

AP

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