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Sunday, July 31, 2011

Q&A: US debt crisis

The battle between the White House and Congress continues over how to raise the US debt ceiling. If the 2 August deadline is missed, the government could quickly run out of money.
Why is the debt ceiling so important?
The US government has a legal limit on how much debt it can run up – $14.3tn at present. It reached the cap in May, which means it cannot borrow any more money.
So how has America been keeping afloat since then?
Treasury secretary Tim Geithner managed to stave off default by suspending payments into two federal pension funds, pledging to repay the money once Congress has approved a higher debt ceiling.
Why can't Barack Obama just raise the debt limit?
Under the US constitution, all government borrowing has to be approved by Congress, and this has led to a protracted stalemate between Republicans and Democrats. The borrowing limit was introduced in 1917 to make it easier for the government to fund its efforts in the first world war. Since then the ceiling has been lifted numerous times – usually it is just a formality. It can also go the other way. During the 1950s economic boom, Congress voted to lower the limit twice.
So what's different this time? Why can't the two sides agree?
Since the financial crisis and recession government spending has soared while tax revenues have suffered, driving up the government's deficit. The Republicans, who control the House of Representatives, insist that the government must cut the deficit first before any agreement on raising the debt limit can be reached.
Has there been any progress in the debt talks?
Both sides accept that the deficit needs to be brought under control, but have different ideas about how to go about it. The main sticking points have been the Republicans' resistance to tax rises and calls for bigger spending cuts than have been backed by the Democrats. The Democrats also want to shield healthcare programmes for the elderly and poor from the cuts. After chaotic scenes in the House on Thursday night, Republicans called an emergency meeting for Friday morning to try to get their plan through the House.
What happens if a deal can't be agreed by Tuesday?
The US treasury estimates that funds will dry up by then, which would leave the government unable to pay its bills – such as social security payments, Medicare, military salaries and debt interest payments. The Republicans claim that the government would get by for a few more days after 2 August, but there is no doubt that the two sides need to agree a deal soon.
How have financial markets reacted?
Investors have become more nervous, and the dollar was under pressure on Friday. Moody's has put America's credit rating on negative watch.
What impact would a default have?
US treasury secretary Timothy Geithner has said a US default would have 'catastrophic' results.
 It would trigger a major global panic. Standard & Poor's has said it would slash the US credit rating from AAA (the top) to D (the bottom). That means banks would technically be barred from using US debt as collateral with central banks, although these rules could be changed.

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