U.S. Congress has been racing against time to strike a bipartisan deal to raise debt limit and reopen the government by the deadline of Thursday.
The debt limit is the total amount of money that the United States government is authorized to borrow to meet its existing legal obligations, including Social Security and Medicare benefits, military paychecks, interest on the national debt, tax refunds, and other payments. Failing to increase the debt limit would cause the government to default on its legal obligations.
Congress is now just one day away from the U.S. Treasury Department's deadline for raising the debt ceiling Thursday, when the government will run out its borrowing authority.
As American lawmakers have been scrambling for a deal done by the end of Thursday to avert debt default and reopen the government, Wall Street have gone through a series of ups and downs since weeks ago. Investors have become increasingly jittery as the deadline approaches, worrying that a fiscal standoff in Washington would put the U.S. short-term debt on some level of risks.
The U.S. government reached its statutory debt limit of about 16.7 trillion dollars on May 19. Since then, the U.S. Department of Treasury has been using "extraordinary measures" to raise funds and pay government bills. The Treasury estimated that it will exhaust those measures on Oct. 17, with merely 30 billion dollars cash on hand, whereas its daily payments can run up to 60 billion dollars.
Fitch Ratings, one of the three major global credit-rating agencies, on Tuesday issued a warning to the U.S. by putting U.S. Treasury bonds' AAA credit rating on Rating Watch Negative, which might be a first step before a downgrade.
Fitch said political brinkmanship and reduced financing flexibility could increase the risk of a U.S. default. "Although the (U.S.) Treasury would still have limited capacity to make payments after 17 October it would be exposed to volatile revenue and expenditure flows."
"The announcement reflects the urgency with which Congress should act to remove the threat of default hanging over the economy," a Treasury spokesperson said in response.
Some analysts contend that the date of Oct. 17 is a soft deadline to avoid default because the government may still have enough money to pay its bills for several more days. According to the Bipartisan Policy Center, the government has to make a 12- billion-dollar Social Security payment on Oct. 23 and about 6- billion-dollar interest payment on the public debt on Oct. 31.
Moody's Investors Services, another rating agency, said in a recent report that there is no direct connection between the debt limit and a default by the U.S. government. "The U.S. government would continue to pay interest and principal on its debt even in the event that the debt limit is not raised, leaving its credit worthiness intact."
Moody's explained that if the borrowing limit is not raised before Oct. 17, the government will have to prioritize among its expenditures. "In our view, the government is very likely to prioritize interest payments because of the potentially serious effects a default would have on financial markets in the U.S. and globally."
A Treasury bond default is not technically possible until Oct. 31 when the Treasury has to make the next interest payment, Moody' s said, noting given the amount that needs to be paid is relatively small, a default is also "extremely unlikely."
