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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
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
