Washington is gearing up for a battle over how many trillions the federal government can borrow to pay its bills, and it's shaping up to be an even bigger brawl than the one just resolved over funding the government for the next six months.
While investors viewed last week's budget brinksmanship as a minor event, they are beginning to grow concerned that many lawmakers and ordinary Americans, fail to grasp the implications of even suggesting the United States would default on its debt obligations.
What is a political football to Congress could end up flattening the economy and hurting consumers by lowering the nation's pristine credit rating and sending interest rates sharply higher.
The Treasury is warning it will reach its $14.3 trillion limit on borrowing, known as the debt ceiling, in early May. Instead of a straight up-or-down vote on raising the cap, Republicans are threatening to attach policy measures on issues such as abortion funding and environmental regulation. Such "riders" were the main sticking point's in last week's budget showdown.
Anything that threatens to derail or delay the process of raising the debt ceiling is a red flag for markets. The longer it takes and the deeper the divide in Washington, the more markets will worry that the United States, the world's largest debtor nation, will default on its debt obligations with economy-rattling consequences.
On Saturday, House Speaker John Boehner told reporters that President Barack Obama had asked him for a "clean bill" on raising the debt ceiling.
"Well, guess what, Mr. President, not a chance you're going to get a clean bill," said Boehner. "And I can just tell you this. There will not be an increase in the debt limit without something really, really big attached to it."
Negotiations over lifting the debt ceiling will also be complicated by the debate over bigger spending cuts for the upcoming fiscal year. The White House is expected to offer up its plan Wednesday to cut the $1.5 trillion federal deficit.
Raising the debt ceiling will require the approval of at least some Republicans in both the House and Senate. As the GOP plots strategy, its hard-line stand has strong voter backing.
According to a recent NBC/Wall Street Journal poll, only 16 percent of voters said Congress should raise the debt ceiling, while some 46 percent said they were opposed. When told that would mean the U.S. could default on its debt, 32 percent supported raising the limit. But 62 percent said they opposed lifting the cap even if it meant the Treasury would not making good on its debt payments.
