US debt crisis: A step closer to default

The White House signaled 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 centers on a fight over funding for President Barack Obama's new health care 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.

A defiant John Boehner, the Republican leader of the House of Representatives, has insisted that Obama must negotiate on changes to his health care law and spending cuts if he wants to end the shutdown and avert a default. Boehner said yesterday that he lacks the votes to pass a straightforward temporary spending bill that would keep the government operating.

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

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 Oct. 17, he exhausts the bookkeeping maneuvers 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," 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, Obama made a previously unannounced visit to the Federal Emergency Management Agency headquarters Monday to draw attention to a government agency that has had to furlough 86 per cent of its workforce as part of the partial shutdown.

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

The one bright spot on Monday is a significant chunk of the furloughed federal workforce is headed 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 paychecks 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 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 Sunday television appearances, Lew said that while Treasury expects to have $30 billion of cash on hand on Oct. 17, that money will be quickly exhausted in paying incoming bills given that the government's payments can run up to $60 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.

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