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Thomas Kenny

The Debt Ceiling Deadline: A Problem Worse than the Fiscal Cliff?

By November 29, 2012

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The fiscal cliff isn't the only issue with the potential to roil the financial markets in the weeks and months ahead. In addition to having to deal with the combination of tax increases and spending cuts set to go into effect at the beginning of 2013, Congress must also contend with another debt ceiling crisis. Recall that in August 2011, political wrangling caused the U.S. government to come close to violating its debt ceiling (in other words, exceeding the maximum amount of debt that the U.S. Treasury can owe at a given time by Congressional mandate). The resulting uncertainty caused the stock market to tank and led Standard & Poor's to strip the United States of its AAA credit rating before Congress finally resolved the issue.

Now, the same crisis could be on the verge of happening again. According to a new report from the Bipartisan Policy Center, the United States could hit its debt limit ($16.394 trillion) as soon as late December. While the Treasury can employ stop-gap measures for a few weeks, the United States could begin to default on its obligations sometime in mid-February. If Congress fails to raise the ceiling by that time, the United States would be forced to default on its debt. Obviously, this is virtually unthinkable. A default would cause all ratings agencies to remove the country's AAA rating, prices of U.S. Treasuries would plummet, the stock market would crash, and the world would be thrown into financial chaos.

Will that happen? Even with the contentious environment in Washington, the answer is almost certainly "no." But the fact that it could happen - no matter how small the chance - means that we will be hearing a lot more about the debt ceiling in the weeks ahead. And if Congress stalls in addressing the issue, we could be in for a repeat of the market volatility that characterized the summer of 2011.

Learn more:

What is the Debt Ceiling? A Simple Explanation of the Debate and Crisis

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