Republicans Question Debt Armageddon Warnings On Debt Ceiling

WASHINGTON (Reuters) Would it really be such a big deal if the United States couldn't pay its bills?

As Washington searches for a budget deal that would give lawmakers political cover to sign off on further borrowing, some Republicans are questioning the Obama administration's warnings of fiscal Armageddon if Congress does not raise the federal government's debt limit in a timely manner.

Their stance suggests the battle over taxes and spending could last well beyond the early August deadline set by the administration, forcing the government to make difficult choices about which bills to pay on time.

The United States reached the legal limits of its borrowing authority on Monday, and the Treasury Department has urged Congress to increase the $14.29 trillion ceiling before August 2, when it predicts it will exhaust other methods for paying its obligations.

Failure to act could bring on a second recession and roil markets worldwide, Treasury officials have said.

But as Republicans, who control the House of Representatives, push for deep spending cuts as the price of any debt-ceiling hike, many of them say Wall Street would understand if Washington didn't get a deal done by then.

"The markets are not fooled by some date imposed to say that that is the trigger for the collapse," House Republican Leader Eric Cantor said in Richmond, according to the Washington Post. "I think the markets are looking to see that there is real reform."

Because the government is taking in more than enough tax revenue to service its outstanding debt, the argument goes, the Treasury Department would be able to service its debt even if it ran out of money to pay all of its obligations.

Some argue that investors might not be upset even if the government missed a few bond payments.

"Failure to raise the debt limit for an extended period of time would be disruptive," U.S. Senator Pat Toomey, a Republican, said at the American Enterprise Institute, a conservative think tank. "It's very important that we also remember that this is not a catastrophic default. A disruptive series of events is not the same as a catastrophe."

Toomey said the debt limit would have to be raised eventually and challenged the administration to tell investors that it will make debt service a priority in the meantime.

DIFFICULT CHOICES

The Obama administration is taking the talk seriously. Administration officials on Wednesday handed out a stack of letters dating back to the 1980s, warning of the dire consequences of putting off a debt-limit increase.

A senior administration official questioned whether bond buyers would continue to pay low rates for government debt while the country was breaking leases on buildings and railroads and deciding what would go unpaid.

"Who's buying our debt in those auctions while we are defaulting on other obligations?" the official said. "The slippery slope of deciding every day what you would pay and what you wouldn't pay is an impossible exercise."

Treasury would face some difficult choices if the ceiling were not raised by the time it runs out of financing options.

The government is projected to collect enough taxes to cover about 60 percent of its expenses this year, according to the nonpartisan Congressional Budget Office. That could easily cover the projected $213 billion in interest costs but would still leave the government far short of the money it needed to pay for everything else -- from wars to student loans.

Toomey's view is catching on with other Republicans.

The head of a group of 174 conservative lawmakers in the House said on Monday that failure to raise the debt ceiling would not bring on a default but only force Congress to prioritize its spending.

"The only thing forcing a default would be Treasury Secretary Geithner allowing such a catastrophe to take place," said Republican Study Committee Chairman Jim Jordan .

Fund manager Stanley Druckenmiller told the Wall Street Journal he was more worried that Washington would fail to reach a long-term budget deal to keep debt under control than the prospect of a few days of missed bond payments.

House Budget Committee Chairman Paul Ryan said on Tuesday that Druckenmiller's comments "captured our feeling pretty well" and echoed sentiments he heard from others.

"If a bond holder misses a payment for a day or two or three or four, what is more important (is) that you're putting the government in a materially better position to be able to pay their bonds later on," Ryan said on CNBC.

Dan Ripp, an analyst with securities firm Bradley Woods, said bond markets would likely remain calm if the Treasury Department was forced to issue IOUs to federal employees or cut back on Medicare payments to doctors as long as it continued to make its debt payments.

But the country's credit rating could permanently suffer if Treasury was forced to miss bond payments as it would blemish a perfect repayment record that goes back more than 200 years.

"When you have a perfect record and then it's not perfect, you can't go back to perfect again," Ripp said.

(Additional reporting by Jeff Mason; Editing by Caren Bohan, Paul Simao and Todd Eastham)

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