Ris­ing debts threat­ens US re­cov­ery

The Pak Banker - - Front Page -


The na­tion’s debt ceil­ing once again looms as the spark to con­gres­sional brinkman­ship that could threaten the slowly re­cov­er­ing econ­omy.

The Trea­sury Depart­ment said Thurs­day that the US prob­a­bly will hit its $16.4-tril­lion bor­row­ing limit by the end of the year, at the same time that Congress will be grap­pling with the au­to­matic tax hikes and large gov­ern­ment spend­ing cuts sched­uled to kick in Jan­uary 1.

“It adds to the cal­dron of the dark brew,” Mark Zandi, chief econ­o­mist at Moody’s An­a­lyt­ics, said of the fastap­proach­ing debt limit. “That makes the dis­as­ter more dis­as­trous.”

The Con­gres­sional Bud­get Of­fice and most economists pre­dict an­other re­ces­sion in 2013 if the con­flu­ence of tax in­creases and spend­ing re­duc­tions known as the fis­cal cliff takes place. And stray­ing too close to the debt limit — not to men­tion hit­ting it — prob­a­bly would lead to a sec­ond down­grade of the US credit rat­ing. In mid-2011, a bit­ter stand­off over the is­sue led to the first credit re­vi­sion. The Trea­sury said Wed­nes­day it could take “ex­tra­or­di­nary mea­sures” to jug­gle the na­tion’s fi­nances to give Congress and the White House more time to work on a debt-limit in­crease. But even those steps — es­sen­tially a se­ries of ac­count­ing ma­noeu­vres — would buy only into early 2013 be­fore the gov­ern­ment faced a pos­si­ble de­fault. As of Tues­day, the US debt was $16.165 tril­lion.

“I think that, as we saw last sum- mer [2011], it’s im­por­tant that the debt limit is raised in a timely man­ner, but re­ally that’s in Congress’ hands,” said Matthew Rutherford, as­sis­tant Trea­sury sec­re­tary for fi­nan­cial mar­kets. It was the agree­ment then to boost the limit that cre­ated the $1.2 tril­lion in au­to­matic spend­ing cuts that are part of the fis­cal cliff. The other part is the ex­pi­ra­tion of the Ge­orge W. Bush-era tax cuts.

Law­mak­ers and Pres­i­dent Obama will try to deal with the fis­cal cliff af­ter next week’s elec­tions. The debt limit will prob­a­bly be ad­dressed then as well, al­though it has not yet been the fo­cus of Democrats or Republicans. House Speaker John A. Boehner (Repub­li­can from Ohio) said in May that he had a sim­ple prin­ci­ple for rais­ing the debt limit — any in­crease must be off­set “by spend­ing cuts and re­forms that ex­ceed the amount of the debt limit in­crease.”

“No de­ci­sions have been made on tim­ing, but the speaker’s prin­ci­ple — that spend­ing cuts and re­forms must ex­ceed any debt hike — will have to be met,” Boehner spokesman Kevin Smith said Wed­nes­day.

A White House spokes­woman de­clined to com­ment. Fed­eral Re­serve Chair­man Ben S. Ber­nanke and Chris­tine La­garde, head of the In­ter­na­tional Mone­tary Fund, have warned about the neg­a­tive ram­i­fi­ca­tions for the US and world economies if the debt limit is not raised.

But the ris­ing limit has be­come a fo­cus of con­ser­va­tives, who point to it as ev­i­dence of the na­tion’s spi­ralling bud­get deficits.

Rep­re­sen­ta­tive Tim Huel­skamp ( Repub­li­can from Kansas), a Tea Party fresh­man, voted against the 2011 debt-limit deal be­cause he said it didn’t cut enough gov­ern­ment spend­ing.

“The Trea­sury’s pre­dic­tions are no sur­prise, as we have an­tic­i­pated hit­ting the debt limit right around or be­fore the time any ac­tual cuts from the debt deal take ef­fect,” he said.

“Ev­ery day that goes by with­out a change of course in Wash­ing­ton is an­other $4 bil­lion added to our debt. Is that the legacy we want to leave our chil­dren?”

The brinkman­ship lead­ing up to the mid-2011 debt limit in­crease caused Stan­dard & Poor’s to down­grade the US credit rat­ing for the first time, to AA+ from the high­est level of AAA. The Gov­ern­ment Ac­count­abil­ity Of­fice es­ti­mated re­cently that the de­lay in get­ting a debt-limit deal cost tax­pay­ers an ad­di­tional $1.3 bil­lion in bor­row­ing costs for the fis­cal year that ended Septem­ber 30, 2011.

Part of the debt-ceil­ing deal pro­vided that the au­to­matic spend­ing cuts — half from de­fence, half from do­mes­tic pro­grammes — would oc­cur over the next decade if Congress and the White House could not agree on a broader deficit-re­duc­tion plan. Af­ter the US tech­ni­cally hit its then $14.3-tril­lion debt ceil­ing in May 2011, the Trea­sury was able to de­lay the ef­fect for about 12 weeks through ma­noeu­vres such as bor­row­ing from two fed­eral em­ployee pen­sion funds.

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