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Factbox: Congress confronts U.S. debt ceiling drama

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© Reuters. FILEPHOTO: View of Washington’s Capitol building, U.S. January 17th 2021. REUTERS/Erin Scott

WASHINGTON (Reuters) – Democrats and Republicans in the U.S. Senate are locked in a partisan standoff over how to remove temporarily the $28.4 trillion debt ceiling, a political drama that could pose risks to the U.S. government’s credit rating, financial markets and the economy.

Current debt ceiling was in effect since Aug. 1. It sets the U.S. Treasury’s borrowing limit. Without raising the debt limit, the Treasury Department may run out of borrowing capacity by October.

WHOSE SPENDING ISN’T IT?

The Democratic Senate Majority Leader Chuck Schumer, and Republican leader Mitch McConnell sparred about debt. They argued publicly over whether the increase in debt is due to President Joe Biden’s policies or other initiatives during President Donald Trump’s tenure.

Both parties played a role in the recent increase in national debt. The tax cuts passed by a Republican-controlled Congress early in Trump’s presidency added about $1.8 trillion to the nation’s debt, according to Moody’s (NYSE:) Analytics. The spending for the COVID-19 pandemic was to be funded by both sides last year. Biden’s Democrats pushed for another round in coronavirus relief, worth approximately $1.9 trillion.

CATASTROPHIC CONSEQUENCES

A grim fate could be in store for the U.S. economy if the impasse leads to default. Without the authority to borrow further, the Treasury may default as it relies on continuing borrowing for its debt service.

Moody’s Analytics’ report warns about a decline of economic activity of nearly 4%, loss of 6,000,000 jobs and an unemployment rate close to 9.9%. There is also a risk of stocks selling off, which could result in $15 trillion in lost household wealth. Additionally, there will be an increase in the interest rates for mortgages, consumer loans, and other business debts.

McConnell acknowledged these risks and said that while he believes the debt ceiling should rise, he thinks Democrats must do so on their own, without Republican support. This is called budget reconciliation.

RETURN TO 2011.

Months of partisan brinkmanship over the debt ceiling in 2011 prompted Standard & Poor’s Corp to downgrade the U.S. government credit rating for the first time in history.

A volatile stock market suffered its worst week since 2008. Investors abandoned the U.S. Treasury bond markets as the debt cost rose. The end result was that Congress agreed to increase the $16 trillion limit on debt hours ahead of the Treasury deadline.

OTHER SUSPENSIONS

The debt ceiling, originally intended to impose fiscal discipline on lawmakers, has been changed by Congress 98 times since the end of World War Two and 17 times since 2001, according to the Congressional Research Service.

The majority of these increases were without drama. However, crisis broke out in 2013 when Republicans tried to lower the ceiling as a way of undermining former President Barack Obama’s Affordable Care Act. Fitch Ratings put the U.S. government under a negative rating.

Bipartisan Budget Bill of 2019 was the most recent to suspend the debt limit. It suspended it until Aug. 1, 2020.

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