Congress, in its October deal to end the government shutdown, suspended the debt ceiling until 7 February, but the Treasury is able to use “extraordinary measures” (deferring large trust fund investments) to stay under the ceiling for some time after this date before running out of money to pay its bills.
Treasury Secretary Jacob Lew has set a deadline for Congress to come to an agreement on raising the debt ceiling: the end of February. If the debt ceiling is not raised in time, the federal government will default on some of its obligations.
A clean increase in the debt ceiling – that is, one with no strings attached – is what President Obama has long demanded. So far, Republicans have not indicated whether they would tie an increase to demands for additional deficit reduction. But we would be surprised if there will be no sabre-rattling by Republican Speaker of the House of Representatives John Boehner and Senate Minority Leader Mitch McConnell.
Still, we believe the upcoming fight over the debt ceiling will prove significantly less disruptive than the most recent one in October, when Tea-Party conservatives provoked a 16-day-long government shutdown. Thus the costs of the irresponsible escapade in October were so high that Republican leaders seem to have realised that they would risk losing the majority in the House of Representatives in the November 2014 mid-term congressional elections if they blocked a debt ceiling increase. In our view, the spending bill passed by Congress last month, which funds the government for the next 8½ months, illustrates the waning influence of the Tea Party-backed conservatives.
If the debt ceiling is not raised in time, Republicans stand to absorb more blame. A recent CNN/ORC International poll showed that 54% of Americans would blame Republicans if the debt ceiling isn’t raised, compared to just 29% who would blame Obama.
However, some uncertainty is likely to creep back into financial markets as we get close to the final deadline in late February. But the risk of a voluntary US government default is next to nothing, in our view.
The debt ceiling weapon is simply so toxic as to be unusable.
Nordea