Debt Ceiling Woes

Right after the House passed the fiscal cliff compromise, President Obama said, "I will not have another debate with this Congress over whether or not they should pay the bills that they've already racked up through the laws that they passed." But Republicans continue to insist that any increase in the debt ceiling must be exceeded by spending cuts and entitlement reforms. "[The president] doesn't even want to have a discussion about it because he knows this is where we have leverage," Sen. Pat Toomey said on MSNBC earlier this week. "We absolutely have to have this fight over the debt limit." Senate Minority Leader Mitch McConnell said Thursday that Republicans in coming months will "force the conversation that Washington needs to have" about spending cuts if need be.

The country's borrowing has already hit its legal limit -- currently $16.394 trillion. As a result the Treasury can't borrow any more money in the markets, so it has begun to use "extraordinary measures" to ensure that the government can continue to pay all its bills in full and on time. But those measures can only buy about two months' of headroom. If the ceiling isn't raised by late February or early March, the United States runs the risk of defaulting on its obligations because the Treasury would no longer have enough money available to pay all the country's bills. To cover a year's worth of borrowing, the debt ceiling may need to be raised by close to $1 trillion.

Obama and McConnell agree on one thing: They both say they have no interest in resolving the debt ceiling debate at the very last minute the way they did in 2011, the last time they went through the exercise. That debate was so bruising that the United States was downgraded after the fact by Standard & Poor's. The government's borrowing rates remained very low throughout. But the Government Accountability Office nevertheless estimates that they were higher during the standoff than they would have been otherwise. The result: An additional $19 billion in interest payments will be owed over the next decade, according to the Bipartisan Policy Center.

There's a good chance the debate this year will go down to the wire if not past it. "The two groups are farther apart than they've ever been," said Steve Bell, senior director of economic policy at the Bipartisan Policy Center. If Congress does not approve a debt ceiling increase, some believe the president could invoke the 14th Amendment, which states: "The validity of the public debt of the United States, authorized by law, including debts incurred for payment of pensions and bounties for services in suppressing insurrection or rebellion, shall not be questioned." By doing so, the argument goes, Obama could direct the Treasury secretary to keep borrowing in order to pay the country's bills in full. The White House has indicated that's not a strategy the president would employ.

And the country could still be hurt financially. By invoking the 14th Amendment, the president could spark a constitutional crisis -- not an affirming message to send markets already questioning Washington's ability to get beyond its dysfunction. And yet, it's not yet clear what else the president could do to contain the damage.

"It is hard to imagine any Treasury secretary, or any president, allowing himself -- or herself -- to be the first to default on the public debt," said Joseph Minarik, research director at the Committee for Economic Development and a former chief economist at the White House Budget Office. "That having been said, no one knows what other options lurk in the file cabinets of the attorneys in the Treasury. They aren't talking ... And I wouldn't have a very high opinion of anyone who did."