Washington Is Counting the Days until the Default

The United States is approaching the day when the limit of borrowing money to cover the budget deficit is reached. If Congress does not increase the debt ceiling by May 16, executive power will be forced to use its remainder of cash and to borrow money from areas of accumulation, in particular from pension funds. And after that, there is a looming threat of default, which the White House blames on the Republicans.

“The White House is warning that catastrophe will strike if Congress fails to raise the limit on the national debt. With too little cash to pay creditors, the U.S. government would default. Interest rates would skyrocket. And the economic recovery would collapse,” the Washington Post alarms.

In the current fiscal year, federal budget expenditures will amount to $3.7 trillion, while revenues (mainly tax revenues) will total $2.2 trillion. The difference between expenditures and revenues is leading to a rapid increase in national debt. By May 16, it will reach the ceiling set by Congress, $14.3 trillion.

However, May 16 will not yet be the date of default. The U.S. Treasury will have to use its available reserves, the main of which — the $200 billion Reserve Fund that was created by the Federal Reserve System — is almost exhausted. Therefore, the Treasury will have to dip into other federal pockets. In the first place, this is the pension fund of state employees. According to the estimates of Treasury Secretary Timothy Geithner, such maneuvers will help the administration hold out until early July.

And then it will come close to the threat of default. Executive power officials attribute blame for this to the Republicans, who impose unacceptable conditions to their consent to raise the limit of national debt.

These charges have not yet had an effect on the Republicans, who now hold a majority in the House of Representatives. They insist on their demand for a substantial reduction in a number of budget expenditures, primarily related to public health insurance programs. Moreover, Republicans demand a tax cut. John Boehner, Speaker of the House of Representatives, said that “If the president doesn’t get serious about the need to address our fiscal nightmare, yeah, there’s a chance it [the debt limit vote] could not happen.”

President Barack Obama recognizes the threat of default too. “We can’t keep borrowing from China all the time,” he said recently.* But he has other saving recipes. In these circumstances, a warning about the possibility of a disaster sounds like an accusation against the Republicans. And they, without making concessions on main issues, suggest the Treasury be flexible in making payments. They insist that the Treasury take care of the payment of interests on loans in the first place, thereby avoiding a formal statement of the issue of default. However, experts warn that the maneuvers of the Treasury in an attempt to postpone the date of default may adversely affect the financial credibility of the United States. In their view, the solvency rating of the U.S. will crawl down, foreign investors will begin withdrawing money from U.S. securities, interest rates will rise and stock prices will fall.

As reported by the Financial Times, a similar warning is contained in a letter of the leading U.S. banks to the secretary of the Treasury. “The warning over the debt limit is the strongest yet to come from Wall Street, highlighting growing nervousness among investors,” noted the newspaper.

*Editor’s Note: This quotation, accurately translated, could not be verified.