Money-hungry US to hit borrowing cap | The Daily Star
12:00 AM, May 16, 2011 / LAST MODIFIED: 12:00 AM, May 16, 2011

Money-hungry US to hit borrowing cap

The debt-laden US government's credit card will hit its limit Monday, creating a cash crunch that puts the country's credit standing at risk as politicians battle over its long-term deficit.
Reaching the $14.29 trillion ceiling set by Congress will not have an immediate impact on government finances, because the Treasury has found about ten weeks of wiggle-room in short-term adjustments and an unexpected April jump in tax revenues.
But with Republicans refusing to increase the ceiling without massive future spending cuts, the longer the fight over bridging the country's deficit goes on, the higher the stakes will get.
If nothing is done by about August 2, there is a chance the United States, which has always merited a top-grade credit rating, could do the unthinkable -- default on its debt payments.
Few think it will get that far, as the White House leads behind-the-scenes talks on a grand strategy on the deficit -- with Republicans insisting on spending cuts and Democrats demanding tax increases as well.
Still, some liken the fight to a game of chicken being played with the country's credit standing at stake.
"Using the debt limit as a bargaining chip is quite risky," Ben Bernanke, the chairman of the US Federal Reserve, warned politicians on Thursday. "At minimum the cost will be an increase in interest rates that will actually worsen our deficit," he said.
"The worst outcome would be one in which the financial system was again destabilized... which of course would have extremely dire consequences for the US economy."
Bond analysts -- who are closest to those who fund the debt -- called a default unthinkable.
"The severity of the outcome is why people are not believing that it will happen," said Aaron Kohli, a US Treasuries specialist at Nomura Securities. "It's the financial equivalent of a nuke going off."
"As far as (US bond) yields are concerned, they are much lower than they were a month ago. So, the market is acting as if there's no problem," said Scott Atkinson of Briefing.com.

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