With talks stalemated on US shutdown, which entered its third day on Thursday, focus is shifting towards a bigger crisis ahead, one with worldwide implications: debt ceiling.
If congress doesn’t raise the ceiling by October 17, the US will run out of money to pay for its obligations — particularly debt taken to bridge the revenue-spending gap.
US Treasury said in a report released on Thursday the consequences of debt default, if it were to happen, would be “catastrophic”, as 2008, or worse.
All that is looking like a possibility after President Barack Obama and congressional leaders failed to break the deadlock during a 90-minute meeting on Wednesday. The fight is not about the budget at all.
It’s about Obama’s signature healthcare reform law, which went into effect on Tuesday, that ultra-conservative Republicans want to kill. Democrats won’t let that happen, of course. Thus the stalemate. And, thus, the talk of debt default.
“A default would be unprecedented and has the potential to be catastrophic,” warned the Treasury report titled “The potential macroeconomic impact of debt ceiling brinkmanship”.
“The negative spillovers could reverberate around the world, and there might be a financial crisis and recession that could echo the events of 2008 or worse,” it added.
The failure to raise the debt ceiling, said IMF chief Christine Lagarde, “could very seriously damage not only the US economy, but the entire global economy”.
Obama warned of the possibility in a CNBC interview:
“When you have a situation in which a faction is willing potentially to default on U.S. government obligation then we are in trouble.”
Debt ceiling negotiations, some political analysts are now saying, may go to hand in hand with talks over the shutdown if the latter was not resolved soon.
And debt ceiling talks can get nasty. It went so close to the brink in 2011, the US got its first ever credit rating downgrade, a blot for the world’s largest economy.
Meanwhile, Bobby Jindal, Louisiana’s Indian-American governor and a potential 2016 presidential contender, blamed “leaders across the board” for the shutdown, saying Obama has failed to solve “big challenges”.