Debt Ceiling: Obama Issues Fresh Warning To Republicans As Stalemate Drags On

Debt ceiling: Obama issues fresh warning to Republicans as stalemate drags on (Guardian, Oct 9, 2013):

President shoots down new suggestions among Republicans that US could prioritise payments to avoid lasting damage

Barack Obama has warned of immediate damage to US creditworthiness if Congress fails to raise the debt ceiling – even if the Treasury can find funds to avoid triggering a technical default in the bond market.

With billions of dollars of payments to social security, recipients and lenders competing for possible attention if such a crisis were to occur, the president shot down new suggestions among Republicans that the administration could prioritise payments to avoid lasting damage.

Dubbed the ‘pay China first’ strategy by some Democrat critics, the argument growing in Congress is that October 17 is not the hard and fast deadline portrayed by the White House because the US has a choice over which bills to pay first and can avoid missing market-sensitive payments.

But the notion was rejected by the president on Tuesday, who told reporters that skipping any payments would alarm markets to such an extent that the cost of borrowing for the US government was bound to go up anyway.

“What I am told is: if the markets are seeing that we are not paying our bills on time, that will affect our creditworthiness – even if bondholders are paid on time,” said Obama.

Obama refused to answer questions about the legal requirements on the US to prioritise certain financial liabilities first, although Treasury secretary Jack Lew is expected to give further details to Congress on Thursday in evidence that will be keenly scrutinised by bondholders and other international creditors already anxious about the crisis.

The last time the US was perceived as close to a default, during a similar standoff over debt limits in 2011, credit rating agency Standard & Poor’s downgraded the US to AA-plus from AAA, even though a temporary deal was struck.

All three agencies would have to take immediate action if payments to bond holders were missed, but may take similar precautionary measures as soon as theOctober 17 deadline for a debt ceiling deal declared by the US Treasury is passed.

Obama again ruled out taking extreme legal steps to circumvent the deadlock in Congress, such as relying on the 14th amendment to make unilateral borrowing decisions.

“Setting aside legal analysis,” the president said taking that approach would cause damage because it would end up tied up in litigation. He also insisted he was not a fan of “rolling out a big coin” to raise the debt ceiling, a reference to the idea of minting a $1tn coin to resolve the situation.

His comments came as positions hardened further between the White House and Republican leadership.

Obama reiterated that he would be prepared to accept a temporary extension of the debt limit and government spending authority as a prelude to talks with Republicans, but otherwise stuck to his position that he will not negotiate at all while Congress continues to threaten a default or maintains the shutdown.

This brought a swift, if increasingly predictable, response from House speaker John Boehner, who pointed to previous occasions when presidents have negotiated to avoid such standoff.

“What the president said today is that if there is unconditional surrender by Republicans, he will sit down and negotiate with us,” said Boehner, “Well, that’s just not how our system works.”

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