Government shutdown: Default now focus, as Treasury warns of 'catastrophe'

On Day 3 of government shutdown, Democrats and Republicans shift the conversation to the looming debt limit, as chances grow that both issues will be resolved together.

With no resolution in sight to the government shutdown, Washington policymakers in both parties are looking ahead to a far more consequential deadline: the Oct. 17 debt limit.

If Congress does not raise the ceiling on government borrowing authority beyond $16.7 trillion by that date, the United States would soon head toward a historic default on its debt payments, risking a global economic crisis.

But that threat may be the bludgeon required to move Washington off the budget stalemate that closed parts of the federal government on Tuesday, analysts say.

On Thursday, the Treasury Department raised warning flags about engaging in debt-ceiling brinkmanship.

“A default would be unprecedented and has the potential to be catastrophic,” Treasury said in a six-page report. “Credit markets could freeze, the value of the dollar could plummet, US interest rates could skyrocket, the negative spillovers could reverberate around the world, and there might be a financial crisis and recession that could echo the events of 2008 or worse.”

Just getting close to breaching the debt ceiling creates uncertainty in the debt markets and raises borrowing costs, Treasury warns. After the 2011 debt ceiling near-breach, Standard & Poor’s lowered the US credit rating below AAA for the first time.

President Obama reinforced the Treasury message in a speech at a construction company in Rockville, Md., Thursday morning, saying the economy – not just the government – would shut down if the federal government could not borrow any more money.  

“As reckless as a government shutdown is, as many people as are being hurt by a government shutdown, an economic shutdown that results from default would be dramatically worse,” Mr. Obama said. 

House Speaker John Boehner has told Republican colleagues that he will not let the nation go into default, even if it means passing debt-ceiling legislation without a majority of Republican votes, The New York Times reported Thursday. 

As the government shutdown was getting under way early this week, House Republican leaders already had their eyes on the debt limit as the real driver of a resolution. According to multiple news reports, Speaker Boehner and his top deputies on fiscal matters are reviving talk of a “grand bargain” that combines a shutdown-ending budget deal and a debt ceiling increase, plus elements of some or all of the following: reform of entitlement programs, tax reform, fixes to the Affordable Care Act (ACA), and changes to the “sequester,” the automatic across-the-board spending cuts that began in March.

With just two weeks to go until Oct. 17, working out such a major deal may be well nigh impossible. Democrats continue to reject the idea of negotiating over government funding and the debt limit, or making any concessions on the funding and timing of ACA implementation. But no matter what the resolution ends up being on the budget impasse, big or small, the main impetus will be the looming deadline on the debt ceiling, both sides suggest.  

House Budget Committee Chairman Paul Ryan (R) calls it the “enforcing mechanism,” citing budget deals in 2011, 1987, and 1985 as precedents.

“All of those budget agreements came together because of debt limits,” Representative Ryan told reporters Tuesday. “That’s what we think will be the forcing action to bring us, the two parties, together.”

Obama is also focusing increasingly on the debt ceiling. At a White House meeting Wednesday with Wall Street leaders, he warned them to be concerned about GOP hard-liners, saying in a TV interview that the deadlock is more than just the usual disagreements between Democrats and Republicans. Then he turned up the heat on a “faction” of congressional Republicans.

“When you have a situation in which a faction is willing, potentially, to default on US government obligations, then we are in trouble,” Obama said in the interview on CNBC.

A meeting at the White House Wednesday between Obama and congressional leaders produced no breakthroughs. Boehner complained afterwards that Obama told them “he will not negotiate.” Senate majority leader Harry Reid, the top Democrat on Capitol Hill, again ruled out any concessions on “Obamacare.”

And so on this third day of the partial government shutdown, which has put 800,000 federal workers on unpaid furlough, no resolution is in sight. Budget analysts who have lived through many a government shutdown, including the combined 26 days the government was closed in late 1995 and early 1996, say that now that the 2013 shutdown has started, chances of an early resolution are diminished.

“I expect the government shutdown to last at least until early next week and possibly until October 18th,” writes Pete Davis, a former congressional budget staffer.

Another former Capitol Hill budget veteran says that once the shutdown reaches the one-week mark, that creates momentum toward combined action on government funding and the debt limit.

“If it lasts a week, two weeks is very likely, because that’ll get us close to the time we have to deal with the debt ceiling,” says Stan Collender, now a partner at Qorvis Communications, speaking on Post TV.

Now that the government shutdown has started, the chance of a debt ceiling breach is now 1 in 4, Mr. Collender says, higher than it was before the shutdown began.

But for the politics of the shutdown to change, he says the shutdown needs to go at least a week.

“It’s not just the people who want to go to a national park,” he says. “It’s the people who sell doughnuts to the coffee shop across the street from the IRS office. They’ve got to start to complain about it. It’ll take about it a week for government contractors to start feeling the pain, for them to realize that the checks they were expecting aren’t being issued.”

Resolving the government-funding impasse and raising the debt ceiling together are possible, he says, but the Republicans have to get something out of it. “It’s hard to see at the moment what that would be,” he says, “but we know it won’t be health care.”