Government Shutdown, Debt Talks Continue

6:51 AM, Oct 16, 2013   |    comments
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Photo: Getty Images

(CBS News) -- Attempts to craft a deal to end the government shutdown and raise the debt limit fell apart in the Republican-led House Tuesday evening, after the latest Republican proposal seemingly failed to garner sufficient support. The House shelved the vote it was aiming for, leaving Senate leaders to figure out a last-ditch solution.

By Thursday, if Congress hasn't raised the nation's debt limit, the Treasury will have exhausted its borrowing authority and will be relying on limited cash reserves to pay off the nation's debt. It won't necessarily happen at 12:01 a.m. on Thursday, and it may take a few days or even weeks for the world to feel the full impact of such an unprecedented state of economic uncertainty.

Still, the White House is furiously trying to drive home the point that Congress needs to raise the debt limit as soon as possible.

"Every day that we get closer to the point beyond which we've never been, which is where the United States does not have borrowing authority, creates more trouble for our economy and uncertainty globally, which has a negative impact on our economy," White House spokesman Jay Carney said Tuesday.

"The deadline for avoiding uncertainty has passed" already, he added.

Indeed, the global rating agency Fitch said Tuesday that the United States' AAA credit rating is now under review for a downgrade.

"Although Fitch continues to believe that the debt ceiling will be raised soon, the political brinkmanship and reduced financing flexibility could increase the risk of a U.S. default," the firm said in a statement.

The statement also said, however, that "even if the debt limit is not raised before or shortly after 17 October, we assume there is sufficient political will and capacity to ensure that Treasury securities will continue to be honoured in full and on time."

A BofA Merrill Lynch interest rate strategist reportedly wrote in a note to clients that the Treasury Department can effectively run on fumes until Nov. 15 before it actually has to default on its loans.

That kind of leeway -- the fact that there's not a hard deadline before calamity hits -- has contributed to the intransigence in Congress. Rep. Mick Mulvaney, R-S.C., for instance, has suggested President Obama is lying about the threat of default that comes with breaching the Oct. 17 deadline, arguing that the Treasury Department could prioritize interest payments over other obligations (even though it would be illegal for the department to make that decision and practically untenable).

"We're not going to default; there is no default," Mulvaney said. "If the president wants to lie to the public, I can't stop him."

So while downplaying the consequences of breaching the Oct. 17 deadline, House Republicans have kept up their demands to tinker with Obamacare before raising the debt limit or reopening the government.

If the debt limit isn't increased before the Treasury Department depletes its cash balance, according to a Goldman Sachs report, there could be a "rapid downturn in economic activity." The firm estimates that after just a month of breaching the debt limit, there would be a 4.2 percent drop in annualized GDP. Most predict that unemployment would rise, interest rates would soar and the world economy would suffer.

"There is nobody in this field who understands how financial markets work and understands what the impact of default would be on the global economy who accepts the absurd position taken by the debt limit or default deniers," Carney said Tuesday. "This is a serious matter."

Carney rejected the idea that a delay of a few days in catastrophic consequences could undermine the administration's warnings.

"What's a risk is even flirting with the idea that we should try to wait until the very last moment before a bill comes due that we can't pay," he said. "This is what some Republicans on Capitol Hill seem to be conveying -- that we can cross that threshold and just hope that we can resolve this before we have to delay a payment."

He continued, "Already, once you get to that deadline, you've entered territory that we've never entered before. And that sends a signal, I think, globally that there is uncertainty about the fidelity here in the United States to the principle that we always pay our bills on time. And that is why this line has never been crossed."

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