Scenarios: How Congress could raise the debt ceiling

WASHINGTON Wed Apr 20, 2011 9:24am EDT

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WASHINGTON (Reuters) - The White House and congressional leaders must agree on a deal on raising the $14.3 trillion cap on borrowing in the next few weeks or the United States will be at risk of defaulting on its debt.

If the United States defaulted, it would have dire consequences both for the country and global markets.

Treasury Secretary Timothy Geithner has told Congress that the debt ceiling will be reached no later than May 16. After that date, the government can employ measures to give it more borrowing capacity.

But those measures would only give the government a two-month buffer and the U.S. Treasury would not be able to issue more debt to fund operations after July 8.

Here are some scenarios on how Congress could raise the debt ceiling.

STAND-ALONE DEBT CEILING BILL

The White House wants Congress to pass stand-alone legislation to raise the debt ceiling. That means it doesn't want a repeat of this month's down-to-the-wire negotiations on funding the federal government for the rest of the 2011 fiscal year. Then, Republicans attached a host of conditions to the measure as the price for their support.

By law, Congress has the authority to determine how much the U.S. Treasury can borrow and over what time period. Congress could decide to increase the debt limit month by month, until the end of the fiscal year or until the end of 2012, for example.

But such measures would likely unnerve financial markets looking for more certainty beyond the next few months.

Typically, Treasury will give Congress a range of estimates based on current spending projections in order to help lawmakers determine how much to raise the limit, former Treasury officials said.

Treasury has not publicly said how much is needed, but according to a Reuters analysis of U.S. borrowing needs, an increase of at least $1 trillion is needed to keep the government running through the end of the fiscal year that ends September 30. An increase of more than $2 trillion would last until the November 2012 presidential election.

DEBT LIMIT INCREASE ATTACHED TO ANOTHER BILL

Leaders in the House of Representatives and the Senate could attach debt ceiling language to other legislation, such as a measure to tackle the U.S. budget deficit.

Republicans have been adamant that they will not raise the debt ceiling if steps are not taken to rein in government spending. With Republicans controlling the House and Obama acknowledging that raising the borrowing cap may not be possible without spending reforms, the White House may be forced to give up plans to deal with the deficit and debt ceiling separately.

Republicans could try to attached a constitutional amendment that would require a balanced budget, a measure that is backed by all 47 Republicans in the Senate. Another approach, favored by Republican Senator Susan Collins, would be to limit government spending to a percentage of GDP.

Republicans could also try to push through some of the more ambitious elements of their 2012 budget proposal, which includes overhauling the government's health programs for the poor and elderly and cutting government spending by $5.8 trillion over the next decade.

CONGRESS DOES NOT PASS BILL BY MID-MAY

Treasury would be forced to start taking extraordinary measures to give the country more room to borrow. Those actions include suspending the sales of state and local government Treasury securities and issuing more short-term cash management bills instead of longer-term debt.

Although Geithner has warned Congress that a failure to act in a timely manner could spook investors, many in Congress view July 8 as the deadline.

"I think July 8 is the drop dead," Richard Durbin, the Senate's No. 2 Democrat told Reuters.

(Reporting by Rachelle Younglai, David Lawder; Editing by Kieran Murray)

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