While the budget deal that passed the House and Senate will avoid another government shutdown for the next two years, it didn’t address the debt ceiling. That crisis could enter the political fray as early as February.
Congress raises the debt ceiling from time to time to give the Treasury Department the ability to borrow enough money to meet the country’s obligations and pay the debt it owes. The deal to re-open the government in October suspended the debt ceiling until February 7. Treasury Secretary Jack Lew warned Congressional lawmakers at the United States will exhaust its borrowing authority to avoid breaching the debt ceiling as soon as late February or early March in a letter on Thursday. That’s when the use of so-called extraordinary measures, which gives the country a little breathing room, will run out.
While the Treasury calls these actions extraordinary, they have become routine since 2011, when Republicans began threatening not to raise the debt ceiling in order to make a long and varied list of demands. Republicans have called the debt ceiling a “hostage worth ransoming.” This strategy ended a 50-year precedent in which lawmakers raised the debt ceiling as necessary to avoid having the U.S. default on its debt, including seven times under President George W. Bush.
And it can have disastrous consequences. The country narrowly skirted by a default in 2011, but even though a real default was avoided, it still led to the first ever downgrade of U.S. debt. That episode, the Treasury has found, led to a sharp decline in consumer and business confidence, intense turmoil in the financial markets that went on for months, and a slowdown in job growth. Household wealth fell by $2.4 trillion in six months, retirement assets dropped by $800 billion, and the average mortgage holder saw monthly payments rise by about $100. The most recent fight over the debt ceiling, which got tied up with the government shutdown in October, nearly brought about another downgrade of the country’s debt.
It’s not entirely clear what would happen in the event of an actual default, but the Treasury Department has warned that it could create “a recession more severe than any seen since the Great Depression.” Investors could become unwilling to lend to the U.S., which could mean a permanent rise in the cost of borrowing money, which would raise interest rates for all borrowers, from the government to the average American with a mortgage. Missing one interest payment on the country’s debt could make the S&P stock index drop by 45 percent and could have a worse impact than the fall of Lehman Brothers, which resulted in the stock market losing half of its value.