Treasury warns of crisis absent debt limit deal

Reuters News
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Posted: Jul 01, 2011 11:28 AM
Treasury warns of crisis absent debt limit deal

By Pedro Nicolaci da Costa

WASHINGTON (Reuters) - The Treasury on Friday kept up the pressure on Congress to strike a deal to raise the debt ceiling and prevent a default, repeating that it would run out of legal room to borrow on August 2.

President Barack Obama has been butting heads with congressional Republicans, who are using the $14.3 trillion legal debt limit as a bargaining tool to push for cuts in spending.

Democrats say the debate is disingenuous, pointing out that Republicans just recently pushed hard for tax cuts for the wealthiest Americans that added significantly to the deficit.

Treasury Secretary Timothy Geithner has warned of major risks to the world economy if Congress fails to act, potentially triggering a default on U.S. debt that would send shivers through an already-fragile banking system.

"Geithner urges Congress to avoid the catastrophic economic and market consequences of a default crisis by raising the statutory debt limit in a timely manner," Mary Miller, assistant secretary for financial markets, said in a statement that accompanied the Obama administration's latest monthly estimate on when the debt limit would become binding.

Fears of a technical default have been rising after bipartisan talks between the White House and lawmakers fell apart in Washington last week.

The political impasse has driven credit rating agencies to warn about possible downgrades to the U.S.'s top-notch AAA credit rating.

The U.S. government bond market is considered the safest and most liquid, and investors around the world hold large quantities of the debt as a safe-haven instrument.

If Treasuries were suddenly deemed riskier, U.S. interest rates would likely spike and equity markets and the value of the dollar could fall dramatically.

(Reporting by Pedro Nicolaci da Costa; Editing by Andrea Ricci)