- The Washington Times - Thursday, February 10, 2011

The White House is warning of financial Armageddon this spring if Congress fails to raise the Treasury’s $14.3 trillion debt ceiling, but many on Wall Street are skeptical that the looming spending clash will produce anything but riveting political theater.

Wall Street ratings agencies are not particularly worried that the U.S. Treasury will be forced into default, and some traders and investors say they are less concerned about the market impact of an extended partisan spending war than its potentially adverse effect on the economy and the nation’s social fabric.

Republicans, though far from united over what to do about the debt ceiling, nearly all want to couple the measure with some kind of major spending cuts or reforms.

Some freshman Republicans backed by the tea party say they will not vote for any increase in the debt ceiling at all, in a bid to force draconian, immediate spending cuts. Others are drafting a plan that would allow selective increases in the debt to finance Social Security payments, military spending and interest payments to Treasury’s bondholders.

A leading Senate conservative and tea party favorite, Sen. Jim DeMint of South Carolina, wants to attach a balanced-budget amendment to the Constitution on legislation that would increase the debt limit.

SEEKING BALANCE: Sen. Jim DeMint wants to attach a balanced-budget amendment to the Constitution on the debt limit. (Associated Press)
SEEKING BALANCE: Sen. Jim DeMint wants to attach a balanced-budget amendment to ... more >

The proliferation of Republican plans to try to force major spending cuts and reforms as their price for raising the debt ceiling has prompted dire White House warnings that such plans risk forcing the Treasury into default and setting off financial turmoil in markets worldwide.

But to David Wyss, chief economist at Standard & Poor’s Corp., both sides are manufacturing an “artificial crisis.”

He expects the clash over the debt limit to be mostly “high-octane political theater” rather than a major market-moving event. But he said there’s a small chance the highly charged political atmosphere could produce a real blowup.

“It’s a political game of chicken — a way of making the other side flinch,” he said, adding that credit agencies take a dim view of what has become a ritual fight over the debt limit that occurs each time it is put before Congress.

“The problem with games of chicken, of course, is that there is always the risk that neither side flinches,” however “irresponsible” that might be since Congress already has approved the spending increases and tax cuts that caused the debt to rise, Mr. Wyss said.

The Treasury can employ a number of “exceptional measures” that would extend the deadline for passing a debt-ceiling increase by some estimates into July or August. Once the limit is reached, the government would either have to cut spending immediately or put off paying its debt obligations in a first-ever default on U.S. government securities.

“Default by the U.S. Treasury could cause significant and long-lasting financial and economic disruption,” Mr. Wyss said, but “we don’t believe there is a significant chance of this occurring, as implied by our ‘AAA’ U.S. sovereign credit rating and its stable outlook.”

Mr. Wyss added that “temporary delays in raising the debt ceiling will most likely have no effect because such delays have occurred many times before.”

Federal Reserve Chairman Ben S. Bernanke was not so nonchalant about the looming spending clash in an appearance before the House Budget Committee on Wednesday. He stressed the danger of letting Treasury’s borrowing authority lapse and sought to discourage Republicans from crossing that threshold.

“Failure to pay interest on the debt would create an enormous crisis in financial markets,” would raise the interest rates that Treasury pays for years to come, and would make reducing the deficit much harder because of the higher debt payments, he said. “We could have a seizing of the system that would be quite detrimental to the economy.”

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