The timer is officially set on the debt ceiling.
The U.S. will hit the debt limit Monday morning as the temporary reprieve passed by Congress last February expires at midnight Sunday.
The national debt was $17.2 trillion when the ceiling was suspended, and the new ceiling is the current level of debt: $18.1 trillion.
There is no immediate need to raise the ceiling. Treasury Secretary Jack Lew can use several tools to make sure the government pays its bills on time until sometime this fall.
For now, the Treasury cannot issue new bonds that would push the debt above $18.1 trillion. If a bill to the federal government comes due, whether it’s for interest on existing debt or any of the government’s other payments, the Treasury must pay it using incoming tax revenue or by creating space under the debt limit.
Lew has the ability to juggle government accounts long enough to pay all bills through October or November, the nonpartisan Congressional Budget Office estimated earlier in March.
But during those two months would come what budget-watchers have begun calling the X-Date: The day on which the government wouldn’t be able to pay all its debts in full and on time. Defaulting on a Treasury debt would have unknowable and possibly catastrophic consequences for the world economy.
The question is whether President Obama and the Republican-led Congress can agree on a plan to raise the debt ceiling before then.
There have been close calls in the past, but more recently House Speaker John Boehner has passed increases with Democratic votes with relatively little political fallout.
What’s different this year is that Obama, who vowed not to negotiate over the debt ceiling after the high-stakes showdown in 2011 and maintained that stance throughout the government shutdown and standoff of 2013, must contend with a Republican majority in the Senate and an even larger Republican majority in the House.
Republican leaders have tried to manage conservatives’ expectations. “We’re certainly not going to shut down the government or default on the national debt,” Senate Majority Leader Mitch McConnell said in an interview with CBS on Sunday.
Nevertheless, many Republicans seek to force Obama’s hand by attaching ambitious conservative measures to the must-pass legislation to raise the debt ceiling.
And some have said they will oppose any increase in the ceiling at all.
“Go to the Republicans in the House and count the number who have made a pledge in their election, to their constituents, that they will never raise the debt limit. And you will find out that you cannot get to 218 votes with Republicans alone,” said Douglas Holtz-Eakin, president of the conservative think tank American Action Forum, speaking at an event in Washington Friday. “There’s no way John Boehner can put together anything — a debt limit increase plus close every agency in the federal government, that won’t pass — so it’s always going to be an extremely messy situation in the House, no matter what.”
That showdown, however, is potentially months away, as Lew uses the tools at his disposal to keep the debt below the ceiling.
On Friday, he announced his plans to begin two of the biggest, namely withholding Treasury securities from two government retirement funds.
There are roughly $350 billion of such “extraordinary measures” available to Lew, according to the Bipartisan Policy Center’s estimates. Those efforts, as well as the fact that most tax refunds already have been paid out and the government is set to run a surplus over the coming few months, will allow the Treasury to postpone the day of reckoning until October or November.
Before then, Congress faces a number of fiscal deadlines that will test the GOP’s cohesiveness. The highway trust fund must be replenished by the end of May and the Export-Import Bank’s charter expires at the end of June, among other key events.
Most importantly, the Senate and House must agree on a budget resolution by April 15. If they can remain united on the budget, Goldman Sachs economist Alec Phillips wrote in a research note, “it would raise the probability that they would be able to send the president legislation to raise the debt limit coupled with other policy changes, since (1) it might allow the debt limit to be raised through the reconciliation process, and (2) it would demonstrate that Republicans in both chambers might be able to come together to pass controversial legislation.”
If Republicans are able to stick together and challenge Obama by tying significant demands to the debt ceiling hike, Phillips noted, the debt ceiling vote could be far more contentious and worrying to investors than recent fiscal fights, in which Boehner has been forced to pass legislation with Democratic votes.
But the possibility of Obama signing legislation he opposes to get a debt ceiling hike, as he did in 2011, is also low, argued Guggenheim Securities analyst Chris Krueger.
“We just don’t see this happening again,” Krueger wrote Friday in a note. “Obama has been adamant that de-weaponizing the debt ceiling is a legacy issue.”
Krueger spelled out five other possible resolutions, including a GOP cave, the creation of another process like the Super Committee set up in 2011, and a “Thelma and Louise” scenario in which the X-Date is crossed with no resolution in sight.
Another possibility is one that Republicans are sure to mention: that the Treasury could prioritize payments on the debt, and skip other payments, thereby avoiding a market-destabilizing default. Incoming revenues, in most months, are enough to meet interest payments.
Lew, in addition to past Treasury secretaries of both parties, has been adamant that prioritization is not feasible. Whether the Treasury has the ability to do so is still a matter of some controversy. On Friday, credit-ratings agency Moody’s suggested that the agency “likely” would be able to make interest payments after the X-Date, while other outside analysts have disagreed.
Beyond that possibility lie even more far-fetched scenarios, according to Krueger, such as Obama simply declaring that it is unconstitutional not to pay the obligations of the government under the 14th Amendment, or using a loophole in a law regarding collectors’ coins to mint trillion-dollar platinum coins to deposit in the Treasury’s account at the Federal Reserve.
Spending time contemplating such possibilities detracts from the pressing business of Congress, said David Wessel, the director of the Hutchins Center on Fiscal and Monetary Policy.
“You can think of lots of things that might increase the GDP a little bit — growth,” Wessel said Friday. “You can pick them, it could be tax reform, it could be investment in infrastructure, it could be changing Obamacare, it could be changing Dodd-Frank, but the debt ceiling debate diverts attention from the things that would make America better. And that’s just really a tragedy.”
