Next Debt Fight Will Be Ugly, But After Election

The U.S. economy is finally gaining strength. Unless the recovery derails, the country is unlikely to see another bitter showdown over raising the debt limit before the Nov. 6 election. The fight will surely be nasty, but just how nasty depends on how the election turns out.

Treasury Secretary Timothy Geithner said last week the U.S. debt ceiling, now $16.4 trillion, will probably be reached by the end of 2012.

“I think even with agreement and prospect on the payroll tax, we still do not expect [to hit] the debt limit until quite late in the year, significantly after the end of the fiscal year, but before the end of the calendar year,” Geithner told the Senate Budget Committee.

The fiscal year ends on Sept. 30. Whether the debt limit is reached before the presidential election (a third of Senate seats and all House seats will also be at stake and control of one or both could change, setting up a particularly nasty fight along party lines) depends on how well the economy performs. But even if the recovery slows down, or simply doesn't speed up, and the limit is reached before the election, the Treasury Department can—and likely will—use "extraordinary measures" to push back the drop-dead deadline for raising it.

Republican Sen. Rob Portman of Ohio, a former director of the Office of Management and Budget, predicts the debt ceiling will be hit in mid-October unless the administration reins in spending or the Treasury Department uses those measures.

“Without a change in the debt trajectory, the debt ceiling will be eclipsed by October 15, 2012, unless the Department of Treasury again uses emergency protocols to shift that date past Election Day 2012,” Portman said in a statement last week.

A stronger economy is good news for the debt limit; the more the economy grows, the less likely the limit is to be reached early on.

Though optimistic about the recovery's course, analysts at Capital Economics were cautious last week.

“The U.S. economy has already been at this point twice before since the recession began, in early 2010 and then early 2011, only for growth to fall back sharply,” they wrote.

Economic forecasters tick off now-familiar election-year headwinds: the European sovereign debt crisis, oil prices, and the threat of another natural disaster disrupting global supply chains.

Even without those problems, it would take a huge unexpected surge to get the economy going to the point where the debt-ceiling forecast would change meaningfully.

“As far as growth is concerned, I just don’t see the potential for the economy to grow [enough] … to have a really material impact on when the ceiling is hit,” said Jeffrey Greenberg, an economist at Nomura Securities International. “I think the debates will come up again soon and it probably would be at an uncomfortable time for politicians.”

How uncomfortable will be determined by the election's outcome and how long Treasury pushes the deadline back. A debt-limit fight between a GOP White House and a Republican-controlled Congress could lead to larger disagreements over government spending and whether the country should default rather than raise the debt ceiling. Another nasty—and quite possible—scenario would be split party control over the White House and Congress. A lame-duck fight would be deja vu.

To buy time, or move the deadline past the election or even into next year, the Treasury Department can suspend the sales of certain state and local Treasury securities, as well as the reinvestment of the Government Securities Investment Fund and the Exchange Stabilization Fund, and redeem existing investments of the Civil Service Retirement and Disability Fund while suspending new ones.

But Treasury can’t push off the deadline indefinitely. The debt limit was set to be reached in May, but Treasury made it until Aug. 2 last year. With a similar three-month delay in hand, it would take a serious economic blow for the debt fight to happen before Election Day. After, though, expect a fresh round of brinkmanship.

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