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Missed debt cap deadline triggers high stakes battle

The US government debt limit was reinstated on Sunday, sparking a high-profile battle over federal spending with a devastating impact on global financial markets.

A two-year debt ceiling suspension contract expired at midnight after inactivity by Congress and President BidenJoe BidenCDC boss clarifies vaccine comments: “There will be no nationwide mandate” Overnight Defense: First Group of Afghan Evacuees Arrive in Virginia | Biden Signs Capitol Security Funding Bill and Refunds Guard | Pentagon Raises Health Protection Weeks After Lowering Biden Urges Local Governments To Avoid Evictions MORE to give the US more powers to borrow. The Treasury Department will now begin to take so-called “extraordinary measures” to prevent a US default.

These steps will likely avert a default until October or even November before Biden has to sign a bill to raise or suspend the limit again.

The expiry of the debt limit has triggered numerous partisan stalemates over the past ten years, most recently in 2019. Each time Congress has raised or suspended the debt ceiling. But the weeks leading up to a potential default were often the most strained, both for financial markets and for administrators.

“I respectfully urge Congress to protect the full faith and creditworthiness of the United States by acting as quickly as possible,” said Treasury Secretary Janet YellenJanet Louise YellenFed boss holds on to inflation concerns wrote in a letter to Congress leaders last week warning that by delaying action they would risk “irreparable damage to the US economy and the livelihood of all Americans.”

There is no clear path to a bipartisan deal as Republicans seek spending cuts that Democrats are not considering.

Although the Democrats have narrow majorities in both the House and Senate, they will still need the support of 10 GOP Senators to avoid filibustering over laws to raise or suspend the debt ceiling.

Republican leaders have said the Democrats that there cannot be a bipartisan agreement on the debt ceiling without a series of deleveraging measures targeting the national debt of around $ 28 trillion. Several GOP lawmakers launched a deal similar to the 2011 Budget Control Act, which ended a debt ceiling stalemate just before the US suffered its first credit downgrade.

However, Democrats argue that raising the debt ceiling should be tied to controversial legislation like taking the financial system hostage.

Without the help of the Republicans, Democrats would have to agree to a debt ceiling hike through a budget balancing act that only requires a simple majority in each chamber but the support of all 50 Democrats in the Senate.

The Congressional Budget Office (CBO) estimated in June that Congress likely had until October or November before the Treasury Department exhausts its exceptional measures and ability to pay government bills on time. However, both the CBO and the Treasury Department have warned that soon after lawmakers return from a planned summer break in September, the US could be on the verge of default if they help pass legislation to allow the government to shut down on October 1 avoid being faced with a time shortage.

Yellen also said the uncertainty caused by the coronavirus pandemic and the federal government’s fiscal response have made it harder to pinpoint exactly how long the U.S. can avoid defaulting.

The debt ceiling does not directly prevent the government from spending money, nor can it cancel bills that the US has to pay. The limit merely prevents the Treasury Department from borrowing further to pay for expenses already approved by the President and Congress.

A default would likely cause massive disruption to markets and the economy. Trillions of dollars in government bonds held by overseas governments and investors rely on confidence in the federal government’s ability to pay its bills. A debt default could shake that confidence and trigger a catastrophic financial crisis.

Non-partisan experts have been calling on lawmakers to examine alternatives to the debt ceiling for years, warning that even the prospect of default is a dangerous hindrance to the financial system.

ON 2015 report the Government Accountability Office, which analyzed the 2013 debt ceiling, found that “Investors reported taking unprecedented measures to systematically avoid certain government bonds,” which are considered almost as safe as cash, leading to widespread problems led the credit markets.

“Industry groups stressed that even a temporary delay in payment could undermine confidence in the full confidence and creditworthiness of the United States and, therefore, cause significant damage to the markets for government bonds and other assets.” the report said.

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