DEFAULT: QUESTIONS AND ANSWERS
Q: How could the United States default?
A: Washington takes in about 70 cents in taxes for every dollar it spends, so it must borrow to pay its bills. Congress put a ceiling on government debt and lawmakers haven't struck a deal to raise it before the government maxes out its borrowing authority Thursday.
Q: What will happen then?
A: Bills will have to be paid with incoming revenues and cash on hand. The Congressional Budget Office thinks the United States would start missing payments on at least some of its obligations between Oct. 22 and the end of the month — in particular, a Social Security payment is due Oct. 23.
Q: How would default affect the economy?
A: It would sink like a stone. Once the cash on hand ran out, the government would have to slash its spending by about a third. If investors lose their cool, stock markets could tumble and credit markets could freeze up because U.S. debt serves as collateral for trillions of dollars in loans and other financial transactions. The Treasury has warned a default could trigger the worst recession since the Great Depression.
— Reuters
LATEST DEVELOPMENTS
— After a day of meetings with his Republican counterpart, Mitch McConnell, top Senate Democrat Harry Reid expressed optimism about reaching a deal on raising the federal debt ceiling and funding the federal government.
— The White House indefinitely postponed an afternoon meeting so Reid and McConnell could continue to negotiate.
— Aides said a deal would extend the debt ceiling until spring and fund the government until late this year while creating a bipartisan panel to try to reach a broader pact on deficit reduction. But it would have to be approved not only by the Senate, but the House, where conservatives have been less receptive to compromising with the Democrats.
— Treasury Secretary Jacob Lew reemphasized that the government’s borrowing authority will run out Thursday, and Obama and others warned of severe consequences if a default follows.
Hopes grew Monday for a deal to head off a U.S. government default and end a partial government shutdown after encouraging comments from the often antagonistic congressional leaders at the center of the talks.
The stock market turned positive on the optimistic predictions of Senate Majority Leader Harry Reid for the Democrats and Senate Republican leader Mitch McConnell.
“We’ve made tremendous progress, Perhaps tomorrow will be a bright day,” Reid declared after an intense day of negotiations with McConnell and other lawmakers, suggesting agreement could be announced soon after weeks of gridlock.
The White House announced that President Barack Obama was calling them and the party leaders in the House to discuss the economy-threatening crises. But a White House meeting, set for Monday afternoon, was postponed indefinitely to give Reid and McConnell more time to work.
Congress has failed to pass a bill temporarily funding the government, leading to a partial government shutdown that has furloughed 350,000 federal workers. Separately, if Congress does not approve a measure increasing the amount of money the U.S. is allowed to borrow, the Obama administration says the federal government will not be able to pay its bills, risking a default that experts say could prove catastrophic for the economy.
The two normally routine pieces of legislation have become entangled in disputes over Obama’s health care overhaul and overall government spending.
Visiting a charity not far from the White House, Obama on Tuesday blended optimism that a deal could be made with a slap at Republicans.
“My hope is that a spirit of cooperation will move us forward over the next few hours,” he said. And yet, he added, “If we don’t start making some real progress both in the House and the Senate, and if Republicans aren’t willing to set aside some of their partisan concerns in order to do what’s right for the country, we stand a good chance of defaulting.”
Even if a deal receives Senate approval, any legislation would also require passage in the House, where a large faction of conservative, tea party-aligned lawmakers precipitated the shutdown two weeks ago despite the efforts of both McConnell and Republican House Speaker John Boehner. In the days since, polls have shown a marked deterioration in public support for the GOP.
Officials said Reid and McConnell — who also met with Boehner on Tuesday — discussed legislation to raise the government’s $16.7 trillion debt limit until spring, staving off the possible default. It was not clear if any deal would permit Treasury Secretary Jacob Lew to employ a series of steps that could add additional months to the extension, as administrations in both parties have done in recent years.
Reid and McConnell also talked about legislation to fund the government until late this year and considered appointment of House and Senate negotiators to seek a deficit-reduction agreement that could ease or eliminate a round of automatic federal spending cuts scheduled to begin in January. While the current round of cuts — part of a 2011 agreement to raise the debt ceiling — fell on both domestic programs and the military, the upcoming reductions would hit primarily the Pentagon.
Officials cautioned that those details could change, and there was even more uncertainty about other elements of a possible deal.
Also under discussion, officials said, was a tightening income verification requirements for individuals who qualify for subsidies under Obama’s health care law.
Separately, Democrats were resisting a Republican-backed proposal to suspend a medical device tax that helps fund the subsidies. The tax is widely unpopular among lawmakers in both parties, and the outcome of that disagreement remained unclear.
The officials spoke on condition of anonymity, saying they were not authorized to comment on the private discussions.
Treasury Secretary Jack Lew has told Congress the deadline for raising the debt limit is Thursday. He, the president and a wide array of economists, bankers and politicians in both parties and around the world have all warned that a default could have catastrophic consequences for both the domestic and global economies.
Christine Lagarde, the International Monetary Fund’s managing director, spoke with concern about the disruption and uncertainty over the weekend, warning of “a risk of tipping, yet again, into recession” after the fitful recovery from 2008.
Some doubter, however, have said alternatively that no default will because the Treasury will pay interest on U.S. obligations ahead of other expenses, or that if a default does occur, it will not be the calamity that others claim.
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