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From the Fiscal Frying Pan Into the Debt Ceiling Fire

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A new study warns there will be far less time than before to work out a new agreement before the Treasury hits the debt limit and begins defaulting on some of its borrowing and government obligations.

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Until Federal Reserve Board Chairman Ben Bernanke raised concern about it in a speech last week to the Economic Club of New York, the fact that the Treasury will once again hit the debt ceiling in a few months has received scant attention from Congress, the White House and the financial markets.

A little more than a year ago, Washington was caught up in a suspenseful political drama as President Obama and House and Senate Republican leaders fought over the terms of raising the national debt limit to avoid the Treasury's first default on borrowing in U.S. history. Republican House Speaker John Boehner insisted that any increase in borrowing authority be matched dollar for dollar with cuts in spending. But today, with all eyes on the looming fiscal cliff, the soon-to-be-expiring $16.4 trillion debt ceiling has become a relative after thought compared to the fears of the effects of year end spending cuts and tax increases.

A new study by the Bipartisan Policy Center released Tuesday warns there will be far less time than before to work out a new agreement before the Treasury hits the debt limit and begins defaulting on some of its borrowing and government obligations. The Treasury will reach its current statutory debt limit in the last week of December. By mid February 2013, it will have insufficient cash on hand to make all payments when owed.

The government last year used a series of financial maneuvers and tricks to forestall a default on the debt for nearly 11 weeks before a deal was finally struck in early August. This time, the Treasury will have no more than four to eight weeks before hitting a wall, according to the study. That's because the government will be paying out far more – in federal tax returns and interest and principle on its debt -- than it will be taking in early next year.

Moreover, the government will be sure to waste an inordinate amount of taxpayers' dollars if it has to play that game again. The Treasury was forced to squander an estimated $18.9 billion long term in excess interest costs and premiums to continue meeting federal financial obligations while the debt ceiling talks dragged on in 2011. Those wasted funds are the equivalent of what it will cost Congress to once again cancel scheduled cuts in Medicare payments to physicians for the coming year -- the so called "Doc Fix."

Steve Bell, a former Republican Senate budget adviser and now senior director of the BPC's Economic Policy Project, said he marvels that the expiring debt ceiling has been relegated to a secondary concern. That's especially true after Standard & Poor's (NYSE:MHP) downgraded the government's AAA credit rating by one notch in August 2011 to express its dismay with the political turmoil and "brinksmanship" in Washington, even after the last- minute deal struck by Congress and Obama. A repeat of that protracted battle over raising the debt ceiling again could invite a much more severe response and downgrade from S&P, Moody's and other major bond rating agencies . Such a development could force many institutional investors to move their money out of government bonds, Bell said.

Bernanke and other economists and experts have repeatedly warned that the government's failure to avoid the year end fiscal cliff would be a disaster that would likely push the economy back into recession and lead to millions of job layoffs. But Bell warned that failure to raise the debt ceiling could have an even more damaging effect on the economy and the government's ability to borrow.
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