Analysis: Congress faces $2 trillion-plus debt decision
WASHINGTON (Reuters) - The Obama administration has been sounding hazard warnings all year on the need to raise the U.S. debt limit, but it has yet to deliver the worst news: Congress may have to raise it by more than $2 trillion.
Neither the administration nor lawmakers in Congress want to talk about it, but an increase of at least $1 trillion is needed to keep the government running through the end of the fiscal year on September 30, an analysis of deficit forecasts and U.S. Treasury borrowing needs shows.
To last until the November 2012 presidential election, the increase would need to be well over $2 trillion.
The figures are politically hard to swallow.
Getting an increase with a "trillion" handle on it seems unlikely for a Congress with many freshman Republican lawmakers bent on keeping campaign promises to slash spending.
Any increase may be part of a comprehensive budget plan lawmakers need to hammer out as the year progresses. With a multi-trillion price tag difficult to swallow, Congress may opt for a tortuous string of smaller increases. In the process they could bring the United States close to default.
U.S. Treasury Secretary Timothy Geithner won't say how much of an increase he wants. Instead, administration officials say it needs congressional action and is in lawmakers' hands.
Some in Congress think otherwise.
"The number is up to Treasury," Senator Richard Durbin, the No. 2 Senate Democrat, told Reuters on Tuesday. "I want to raise it to whatever is necessary to make sure that the full faith and credit of the United States is not jeopardized."
Geithner has warned of "catastrophic" consequences if the debt limit is not raised and the United States defaults on its debt and other obligations.
It would shake confidence in the global financial system and "precipitate a crisis worse than the one we just went through," he told lawmakers on Tuesday, adding that the dollar would suffer and Americans would face permanently higher borrowing costs.
U.S. public debt stood $84 billion below the $14.294 trillion statutory limit as of Tuesday. The Treasury has said it will reach the limit by May 16, although it could take steps to delay the day of reckoning until around July 8.
Several analysts agreed with Reuters' assessment that a $1 trillion increase would needed to reach the end of the current fiscal year at the end of October.
The analysis is based on the remaining government financing that would be needed if the government runs a deficit of the size the Congressional Budget Office and White House expect. It also takes into consideration the expected replenishment of a $200 billion Federal Reserve emergency lending account.
Passage of an increase with up to an additional $1.36 trillion to last until November 2012 seems impossible given the rancor in Washington.
"My best guess is that whatever deal we get in May or June -- after a tortuous process that brings the U.S. alarmingly close to default -- will only extend the debt ceiling until late this year," said Greg Valliere, chief political strategist at the Potomac Research Group in Washington. "Then we'll have to go through this again."
Although House of Representatives Speaker John Boehner has said an increase is essential, the Republican leader faces pressure from dozens of freshman Tea Party members and other fiscally conservative lawmakers who want to use the need to raise the debt ceiling as a lever for deep budget cuts.
How he manages their demands during this week's debate over a bill to fund the government past Friday will provide clues on ways he will handle the much more crucial debt ceiling talks.
Financial markets have not yet been rattled over the debt limit, partly because it is regularly raised after grumbling. Safe-haven capital inflows amid Middle East turmoil have also helped hold down Treasury yields, keeping the interest rate on the benchmark 10-year note in the 3.5 percent range.
But investor confidence in an increase would likely wane if Congress allows the government to shutdown this week, said Troy Davig, a senior U.S. economist with Barclays Capital in New York. This could cause bond yields to rise.
"Depending on the leverage the freshmen have, if they want to keep this issue in the public consciousness they'll only raise (the debt ceiling) a few hundred billion and have to revisit it every few months," Davig said.
(Reporting by David Lawder and Rachelle Younglai; Writing by David Lawder, editing by Andrew Hay)
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