U.S. to Default If Debt Ceiling Not Raised, Lew Says
Treasury Secretary Jacob J. Lew said Congress needs to pass a debt-ceiling increase by Oct. 17 or the U.S. will be “dangerously low” on cash and risk defaulting on its payments.
“On the 17th, we run out of our ability to borrow, and Congress is playing with fire,” Lew said on CNN’s “State of the Union” today. “If they don’t extend the debt limit, we have a very, very short window of time before those scenarios start to be played out.”
“If the United States government, for the first time in its history, chooses not to pay its bills on time, we will be in default,” Lew said. “There is no option that prevents us from being in default if we don’t have enough cash to pay our bills.”
In response to Obama administration calls for a debt-limit increase without policy conditions, House Speaker John Boehner said today he doesn’t have votes to pass such a bill.
Republicans have sought to end the shutdown by passing legislation that would also delay for one year the mandate for individuals to purchase health insurance, a part of President Barack Obama’s 2010 Affordable Care Act. Lew didn’t specify when the U.S. might default on its obligations.
“I know the speaker well,” Lew said on CBS’s “Face the Nation” program today in response to Boehner’s remarks. “I know the speaker doesn’t want to default. He also didn’t want to shut down the government. He needs to give the majority a chance to vote.”
Lew is projecting that the U.S. will exhaust its “extraordinary measures” to stay under the $16.7 trillion federal debt limit no later than Oct. 17. At that time, the U.S. will have about $30 billion in cash, which will be short of expenditures that can reach as high as $60 billion in subsequent days.
That “is a dangerously low level of cash, and we’re on the verge of going into a place we’ve never been, not having cash to pay our bills,” Lew also said on NBC’s “Meet the Press” today. “Even getting close to the line is dangerous.”
A one-week shutdown will probably shave 0.1 percentage point from economic growth, according to the median estimate of economists surveyed by Bloomberg, with the damage accelerating if the closing persists. The shutdown costs at least $300 million a day in lost output at the start, according to IHS Inc. (IHS), a Lexington, Massachusetts-based global research firm.
“This brinkmanship over and over again is bad for the economy,” Lew said on “Fox News Sunday” today. “We’re the world leader. We’re the strongest, deepest economy in the world. Our currency is the world’s reserve currency.”
Treasury said breaching the debt limit could freeze the credit markets, weaken the dollar, push U.S. interest rates up, and reverberate on global markets, causing a crisis similar to the one in 2008, according to an Oct. 3 report.
So far, the financial-market response to the political gridlock has been muted.
The yield on the benchmark 10-year Treasury increased two basis points last week, trading between 2.66 percent and 2.58 percent. While the yield is up from the record low of 1.38 percent in July 2012, it’s below the average of about 6.7 percent since the early 1980s, the start of the three-decade long bull market in bonds.
The dollar has appreciated about 2.48 percent this year, according to Bloomberg Correlated Weighted Indexes, which measures the greenback against the euro, yen, pound and six other major currencies. The measure for the dollar, while down about 3 percent in the past month, is still poised for its best year since gaining 15.5 percent in 2008.
The U.S. budget deficit in June was 4.3 percent of gross domestic product, down from 10.1 percent in February 2010 and the narrowest since November 2008, when Obama was elected to his first term, according to data compiled by Bloomberg from the Treasury Department and the Bureau of Economic Analysis.
In an Oct. 4 letter to Senator Orrin Hatch, a Utah Republican, Lew declined to say how much Congress should raise the debt limit.
“Congress must choose how long to extend the debt limit,” Lew wrote. “A longer period of certainty would help protect our economy from future political brinksmanship.”
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