WASHINGTON (Reuters) - Nobody likes the idea, but a short-term boost to the U.S. debt ceiling might be the only way Congress keeps the United States from a default in August.
Time is simply running out and the collapse this week of talks led by Vice President Joe Biden underscores just how far apart all sides are on spending and taxes.
The United States has already hit its $14.3 trillion debt limit. If that ceiling on borrowing is not boosted by August 2, the Treasury Department will be out of cash to pay its bills and could default on its debt, sending global markets plunging and threatening to push the U.S. economy back into recession.
Biden’s group failed to agree on a path toward $2 trillion in savings -- a Republican prerequisite for raising the debt ceiling -- due to a sharp divide over taxes. Republicans rule out any hikes while Democrats say they must be part of a deal.
“To get a package of that size with the time remaining is going to be very difficult,” said one official familiar with negotiations. “The chances of a short-term package have definitely increased.”
Talks have now been passed up the chain to President Barack Obama, Senate Democratic Leader Harry Reid and the top Republican in Congress, House Speaker John Boehner.
Officials insist the goal of negotiations remains a deal that will allow the United States to meet its obligations beyond November 2012’s presidential election -- and that means an increase of $2 trillion to $2.5 trillion.
But a smaller, short-term package to stave off default is becoming a more serious option as the clock ticks.
It would buy a few months’ time for lawmakers to make political decisions on spending and taxes, but it holds risks of its own.
Congress would need to add at least the $125 billion in credit the Treasury burns through each month. A temporary fix could weaken the U.S. dollar, push up Treasury yields and invite further warnings of possible credit downgrades from ratings agencies, investment analysts said.
“The muddle-through notion ... requires another decision later to kick the can down the road, and then you don’t know how it’ll get kicked the next time. So it brings fear that the next time it’ll get kicked worse,” said Adnan Akant, head of foreign exchange at Fischer Francis Trees & Watt in New York.
Dick Durbin, the No. 2 Democrat in the Senate, and Mitch McConnell, the top Republican in the Senate, have both raised the possibility of a short-term debt limit deal in recent days.
“We’re very likely going to have a patched-up solution,” said David Gergen, an adviser to four U.S. presidents and a non-partisan political analyst.
“I have always felt they would raise the debt ceiling but would be unable to reach a major agreement until after next year’s election,” Gergen said. “The end of the Biden talks increases the prospects that Congress will raise it, but in the short term -- possibly to the end of the year.”
Senator Charles Schumer, a member of Democratic leadership, asked about whether prospects for a short-term debt limit increase were growing, said on Friday: “We want to avoid a shorter-term debt limit increase at all costs.”
Schumer added, “It could very well rattle the markets ... that’s going to send a very bad signal.”
Federal Reserve Chairman Ben Bernanke and Timothy Geithner, the U.S. Treasury secretary, have repeatedly warned that a failure to rise the debt limit will cause economic “catastrophe” because default will likely trigger panic in the bond markets and a dangerous spike in interest rates.
Three rating agencies have recently warned that the U.S. could lose its coveted top-notch credit rating if steps are not taken soon to curb the federal government’s long-term deficit. It is unclear how markets would react would react to a short-term deal that does not tackle the long-term problem.
Similarly, conservative Republicans, especially in the House, are loathe to be forced to cast multiple votes on increasing U.S. borrowing authority.
They ran for election last November on a promise to shrink the size of the U.S. government and get control of the Treasury Department’s credit card. Some have even called for letting U.S. borrowing authority lapse and requiring that bond-holders be paid beyond August 2, while leaving many government programs to shut down at least temporarily.
An aide to House Majority Leader Eric Cantor said on Friday that the Republican “goal is to do one debt limit increase” and even though he has dropped out of the Biden talks, that goal “has not changed.”
Additional reporting by Richard Cowan, Editing by Jackie Frank