Q & A ON US CONGRESSIONAL DEBT CEILING IMPASSE

For the benefit of those Ghanaians, who find it difficult to understand why it appears that some American conservatives, who say they are patriots and wrap the US flag round themselves so tightly, are risking tipping their beloved country's fragile economy into a recession (in order, say some of their critics, to make political capital out of any fallout from America defaulting in paying its debts - at President Obama's electoral expense they hope), here is a Q&A analysis to help them make sense of the US Congressional debt ceiling impasse. It is culled from BBC news online. Please read on:


Question: Why has the US not agreed a new debt ceiling?

Answer: The White House and Congress are fighting over how to raise the debt ceiling.


President Obama says the US risks being tipped back into recession

With the deadline for reaching a deal fast approaching, the fear is that the US will run out of money.

Question: What is the debt ceiling?

Answer: The US government faces a legal limit on the total amount of debts it can run up in order to pay its bills - including military salaries, interest on existing loans, and Medicare. The current limit is $14.3 trillion (£8.9tn).

The cap was reached in May. Treasury Secretary Timothy Geithner was able to extend the expected day of reckoning to 2 August, by various tricks such as postponing payments into government pension schemes, and thanks to better-than-expected tax revenues.

Republicans, and some analysts, say that even after 2 August, the government has some leeway to continue meeting payments at least for a few more days.

Question: Why can't the Obama administration borrow more?

Answer: Because it is not in Mr Obama's power. The debt ceiling is set by statute and can only be raised by Congress.

An overall borrowing cap was first introduced by Congress in 1917 to make it simpler for the government to finance its efforts in World War I.

Since then the ceiling has been raised dozens of times, and it is usually a formality.

Perversely, Congress also sets the government's spending commitments and tax-raising powers.

This puts the Obama administration in the impossible position of being required to spend more than it earns, while also being prevented from borrowing the difference.

Question: What is the problem this time round?

Answer: The financial crisis and the US's fragile economic condition have caused government spending to soar, while tax revenues have suffered.

This has caused a big rise in the government's deficit - its rate of borrowing.

The Republicans, who control the House of Representatives, say they want to bring the deficit back under control, and have threatened not to raise the debt ceiling unless a deal is reached.

Question: How far apart are the two sides?

Answer: Both sides accept that cutting the deficit is vital. In recent weeks several plans have been floated by one side or another and been batted down.

The most recent proposals include:

A plan from Senate Democrats would raise the debt ceiling by $2.7tn and cut the budget deficit by $2.2bn. It would protect social programmes for the elderly and the poor that are dear to Democrats. In a concession to Republican demands, this plan would not raise new tax revenue.

A two-step plan pushed by the House Republican leadership - and passed in the House despite initial reluctance from conservatives - that would trim government spending by $915bn, including cuts to those programmes, but would only extend the government's borrowing authority for about six months.

The chief sticking points have been Republicans' resistance to tax rises and calls for much bigger spending cuts than the Democrats favour, and Democrats' desire to shield healthcare programmes for the poor and elderly and the Social Security pension programme from cuts.

Finally, a number of House Republicans - mainly newly elected staunch Tea Party fiscal conservatives - oppose raising the debt limit in any form.

Question: What happens if no deal is reached by 2 August?

Answer: The US could be in default, something Tim Geithner has said would be "catastrophic", and President Obama has warned could tip America back into recession.

Economists say President Obama's options could include:

Stopping payments across the board, including debt repayments. This would be a disastrous outcome for financial markets.

Prioritising some payments (particularly interest payments), at least until money completely runs out. Some $23bn of social security payments due on 3 August could in theory be delayed. But these payments are computer-automated and may be technically impossible to stop. Moreover, stopping them would hurt core Democrat voters. And it is not even clear the government has the legal right to prioritise payments like this anyway.

Ignoring the debt ceiling and continuing borrowing. Some have argued that the US constitution gives the president authority to do this. It would certainly spark a constitutional crisis, and possibly impeachment proceedings.

Question: What do academics believe will happen if the US defaults?

Answer: Interest rates on credit cards, car loans and home mortgages could rise sharply, says George Washington University Professor Julius Hobson.

He adds that global financial institutions around the world holding AAA-rated US Treasury notes and bonds would see the value drop.

Harvard University Economics Professor Jeffrey Miron says foreign creditors could start withdrawing money from US banks.

He also says cheques could be delayed to social security beneficiaries.

Question: Surely the US would not default on its debts?

Answer: So far that has been everyone's assumption.

The US has not seen any significant increase in its borrowing cost, in the way that Greece and other indebted eurozone governments have.

The rating agencies are somewhat less relaxed. On 15 July, Standard & Poor's warned it could cut the US's coveted AAA credit rating if no deal is done, which could limit some investors' ability to lend to the US government.

Moreover, some analysts point out that a surprisingly large amount of existing debt comes up for repayment in 2011 - some $1.7tn, or 12% of its total debt.

They fear that investors could panic and refuse to relend the money, forcing a default.

Question: Is there a compromise to be agreed?

Answer: Republicans have proposed raising the debt ceiling by enough to fund the government for another six to eight months, to allow more time for negotiations.

Mr Obama opposes this extension, which would set the new deadline in the run-up to the 2012 presidential elections.

Other Democrats have backed a longer extension, and Senate Republican Leader Mitch McConnell has floated a proposal to give Mr Obama unilateral authority to raise the debt ceiling while giving Congress an opportunity to register its disapproval.

It could be brinkmanship, but both parties agree that talks on a new ceiling cannot go on indefinitely.

Culled from BBC News.