Q&A: What happens if U.S. fails to raise debt ceiling?

   < < Go Back

It is important to understand the debt ceiling ramifications.

from The Denver Post,

Negotiations in Congress to raise the nation’s borrowing limit are up against a deadline of Thursday. If the limit isn’t raised by then, the government will no longer have authority to borrow to pay its bills. So what happens if Thursday comes and goes and the limit isn’t raised? The scary thing is, no one really knows. Going past the deadline would be unprecedented.

Q. What exactly is the borrowing limit?A. The borrowing limit is a cap on how much debt the government can accumulate to pay its bills. The government borrows in most years because its spending has long exceeded its revenue. It stands at $16.7 trillion. The national debt reached the limit in May. Since then, Treasury Secretary Jacob Lew, right, has made accounting moves to continue financing the government. But Lew says those measures will be exhausted by Thursday.

Q. When it runs out of cash, does the government default?

A. Not right away. A default would occur if the government fails to make a principal or interest payment on any of its Treasurys. The first interest payment is $6 billion due Oct. 31. Many experts think that to avoid a default, Treasury would make payments on the debt its top priority. But that is the subject of intense dispute in Washington. The House has approved a bill to require such “prioritization.” The Senate hasn’t passed it, though. And President Barack Obama has threatened to veto it. Without an increase in the borrowing limit, the government couldn’t pay other obligations on time. On Nov. 1, nearly $60 billion in Social Security benefits, Medicare payments and military paychecks are due. Those payments could be delayed up to two weeks. Those payments are also legal obligations, Lew argues, and failure to pay them would essentially be equivalent to a default.

Q. What would the economic impact of all this be?

A. No longer able to borrow, the government could spend only from its tax revenue. This would force an immediate spending cut of 32 percent, the Bipartisan Policy Center estimates. By November, Goldman Sachs estimates that spending would plummet by up to $175 billion. That’s equivalent to about 1 percent of the economy. On top of that, stock markets would likely fall as household wealth shrinks, consumer confidence and spending plunge, and borrowing costs rise, including mortgage rates.

More From The Denver Post: