Showdown looms over raising the nation’s debt limit

Reporting from Washington —  The escalating battle over raising the legal limit on the nation’s debt is one that risks chaos in world financial markets and the creditworthiness of the U.S. government.

“They’re playing with economic fire,” said William O’Donnell, a debt strategist at RBS Securities in Stamford, Conn.

The United States is about $335 billion away from its authorized debt ceiling of $14.29 trillion, Treasury Secretary Timothy F. Geithner told lawmakers Thursday. And the limit is fast approaching.

With the economy struggling, the U.S. budget in a deep deficit and the Treasury Department continuing to borrow money, the debt ceiling will need to be raised as early as March 31.

But many Republicans in Congress — including newly elected lawmakers backed by the “tea party” — have said they oppose raising the debt limit. New House Speaker John A. Boehner (R- Ohio) sounded combative Thursday after declaring barely two months ago that Republicans were going to have to act like adults on the issue.

Any increase in the debt ceiling must be accompanied by meaningful spending cuts, Boehner said. That has set up a showdown in coming weeks that Geithner warned could have “unthinkable” consequences.

Analysts, lawmakers and Obama administration officials all expect cooler heads to prevail — mainly because they always have in the past when the debt ceiling became political fodder. O’Donnell said the bond market was not yet concerned, viewing the dispute as a political sideshow.

But in Washington’s volatile environment, lawmakers and the White House are engaged in an another game of economic chicken after December’s faceoff over extending the Bush-era tax cuts, which Congress approved only a few weeks before they were set to expire.

This time, the stakes are even higher in avoiding a damaging economic hit, Geithner warned in a four-page letter sent to all senators and House members.

If the government hits the debt ceiling, it would not be able to pay interest to those holding Treasury bonds and would default on that debt, “causing catastrophic damage to the economy, potentially more harmful than the effects of the financial crisis of 2008 and 2009,” Geithner wrote.

The Treasury Department also would not be able to do any additional borrowing to pay budgetary obligations, forcing a partial shutdown of the government.

“Even a very short-term or limited default would have catastrophic economic consequences that would last for decades,” Geithner wrote. Investors would be frightened to buy government bonds, he said, causing interest rates to rise sharply for mortgages, credit cards and other borrowings.

The U.S. has never failed to raise the debt ceiling, Geithner noted. According to congressional figures, it’s been raised 75 times since 1962 — sometimes just for a few months, but always in time to avoid a catastrophe. It last was raised in February.

The debt ceiling has become a political issue at times.

When Republicans took control of Congress in 1995, they battled President Clinton over an increase. That forced the Treasury Department to take what it called “extraordinary measures” to delay reaching the debt limit for several weeks, such as suspending some government investments.

That’s an option again this time to buy some time, Geithner said.

President Obama himself attacked the debt limit as a senator in 2006, voting against raising it to $9 trillion at the time — the fourth increase in five years during the Bush administration.

“The fact that we are here today to debate raising America’s debt limit is a sign of leadership failure,” Obama said in announcing his vote, adding that Washington was “shifting the burden of the bad choices today onto the backs of our children and grandchildren.”

White House Press Secretary Robert Gibbs said Obama wasn’t putting the economy in danger at the time because he knew the measure would be approved. The Senate voted 52-48 to raise the ceiling.

“The full faith and credit of our government and our economy was not in doubt,” Gibbs said. “And the president used [the vote] to make a point about needing to get serious about fiscal discipline.”

That’s what some Republicans said they want to do.

“While America cannot default on its debt, we all cannot continue to borrow recklessly, dig ourselves deeper into this hole and mortgage the future of our children and grandchildren,” Boehner said.

As one of its initial actions Wednesday, the new Republican majority in the House voted to require a separate vote on raising the debt ceiling, which in the past has been included in the broader annual budget bill.

Some of the GOP’s most conservative lawmakers, particularly those who won with tea party backing, have said they won’t vote to raise the limit. They contend the move would fly in the face of voters’ call for debt reduction.

“We can’t just have a knee-jerk response where we just raise the debt ceiling,” Rep. Michele Bachman (R-Minn.) told Fox News this week. “We actually have to have cuts.”

Other Republicans were more pragmatic.

“I’m prepared to do whatever the right thing is,” said Rep. Adam Kinzinger (R-Ill.), whose candidacy was backed by tea party favorite Sarah Palin. “We’ll figure out what that is, but, look, we’ve got to make sure we’re paying our bills.”

Senate Minority Leader Mitch McConnell (R-Ken.) said “scary letters” from the Obama administration didn’t help.

“We just need to get together and do something about the biggest problem in the country — other than joblessness,” he said.

The debt ceiling provides one of the few leverage points for House Republican leaders. The Democratic-controlled Senate and Obama can block GOP legislation they oppose, such as efforts to repeal the healthcare overhaul.

But the Obama administration needs the House to increase the debt ceiling, and that allows Republicans to tie that to spending cuts.

Treasury Department officials pointed out that future spending cuts won’t affect the debt ceiling, which covers payments on debts the government already has accumulated.

“These are legal obligations, incurred under the laws of the United States,” Geithner wrote. “Responsibility for creating the debt is bipartisan, and responsibility for meeting the nation’s obligations must be shared by both parties.”

jim.puzzanghera@latimes.com.

Staff writer Kathleen Hennessey contributed to this report.