Who defaults first: Greece or the US?

President Barack Obama President Obama has called for significant spending cuts

Will the US government default on its debt before Greece does? The fact that I can even pose the question tells you we live in peculiar times.

With its next tranche of money from the IMF-EU bail-out now assured, we can say with some confidence that the Greek government will not default next month. Incredibly, the same cannot be said of the US Federal Government.

Just so we're clear: the world is a lot more dependent on the "full faith and credit" of the US than it is on Greece.

A default by the US government - even a temporary, "technical" default - would be a very serious matter, not only for the US but for the global financial system. That is why the smart money has always said it won't happen; that Congress and the White House would come to an agreement in the eleventh hour.

I am in Washington today, and I can report that the smart money is still saying this. It is probably right.

But we are now getting very close to the eleventh hour and - unlike the battle to authorise the budget back in April - this can't be resolved 20 minutes before the government shuts down.

From where we are, default is far from the most likely outcome, but it is certainly conceivable.

Raising the ceiling

By now you may be wondering how a serious country like the US could get into such a mess. Here's a brief recap.

Unlike most countries, the US has a legal limit on the amount the federal government can borrow, legislated by Congress, which is independent of the regular budget approval process.

Congress has raised that debt ceiling at least 75 times in the past 50 years, most recently at the start of 2010, when the limit was raised to $14.29 trillion (£8.92tn).

On 16 May, Treasury Secretary Tim Geithner declared that limit had been reached, and he was starting to implement "extraordinary measures" to limit the government's need for additional borrowing.

For example, he's not been issuing new debt to replace the bonds maturing in various federal employee savings funds, and he's retiring existing debt to pay certain civil service benefits, both of which give the government a little more headroom.

This kind of juggling ought to get them through to 2 August. After that, nothing is certain.

Growing deficit

The Bipartisan Policy Centre has looked at what's coming into the government coffers after that - and what's going out. It's not pretty.

In particular, 15 August looms large for the markets, because that's when $29bn in debt interest comes due. (There are four days a year when the Treasury makes most of its interest payments and that is one of them.) But there's a raft of other spending obligations that would come due before then.

Between 3 and 31 August, the think-tank reckons the federal government will have $172bn in revenues and nearly $307bn in spending commitments - meaning a deficit of just over $135bn. In theory, if the president can't borrow to fund that shortfall, he has to find a way to cut the government's outgoings by 44%. Overnight.

Many have suggested the Treasury could protect the government's credit status by simply prioritising debt interest and other essentials.

The administration says this is unworkable. It's not just that they'd rather not have to explain why they're holding back money from veterans to pay interest to Wall Street; why money market funds are more important than food stamps, say, or paying federal workers.

The larger problem, say Treasury officials, is that the markets would not take kindly to the government reneging on any of its legally mandated commitments, even those that do not directly concern the national debt.

That may or may not be correct. But, once again, you'd rather not put it to the test.

What's the way out of the impasse? "Simple", say Republican leaders. All the president has to do is agree to cut spending by $2 trillion over the next 10 years, without a penny in tax increases.

"Not so simple," replies the president. He's said yes to significant spending cuts, but raising tax revenues has to be part of the mix.

There have been plenty of twists and turns in the debate but that basic difference between the two sides still looms large.

Pubic opinion

Most Republicans in the House of Representatives will not vote for an increase in tax rates of any kind. That has put the focus on tax expenditures as the possible area for compromise - the loopholes and tax breaks which politicians claim to dislike but seldom vote to abolish.

Some senior Republicans are now hinting in this direction, though it's far from clear that their troops will go along with it.

Most economists - including the IMF, the OECD and most Wall Street analysts - reckon that the reform of major entitlements like social security and tax increases will be needed in any long-term solution to the deficit.

But if the polls are to be believed, few Americans do. Indeed, 70% say they don't want to raise the debt ceiling at all.

It's worth lingering over that poll finding. If accurate, it suggests that nearly three quarters of the American public don't want the US government to make good on commitments which a Democratic president and a Republican Congress have already passed into law, in this year's budget.

In such an environment, it's hard for politicians to do the right thing. Especially 15 months from a general election.

To return to where I began, the implications of a default are so serious, you have to bet the two sides will do a deal in the next three weeks, thus saving everyone the worry of a US default - at least until the next time. But plenty of damage will still have been done.

Stephanie Flanders Article written by Stephanie Flanders Stephanie Flanders Former economics editor

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  • rate this

    Comment number 154.

    alanbick from Tring

    Q. for Stephanie Flanders -

    With regard to the Euro crisis, would it not be a sensible solution for the Euro to devalue their currency?. Would this then reduce the debts of the struggling countries such as Greece by giving them more Euro's within the Euro?, albeit only when paying back those in the Euro.

    The EU have recklessly let too many poorer countries into the Euro.

  • rate this

    Comment number 153.

    3 suggestions to US:
    Recover gud amount from stock mkt ( public participation to overcome)
    Cut spending on arms,divert funds for growth in agri sector : engage human energy for tripple benefit i.e. 1 right value for money spend, 2) employement 3) control food price
    Involve corporate house for more jobs. :- for current 9 salaries appoint 10th person means 9 salaries to be shared by 10 people

  • rate this

    Comment number 152.

    We Democrats grasp the danger of default, as does Wall Street. We have owed more of our GNP than we do now, and have come out of it. But Obama is facing an opposing party that has stated that its prime goal is to make him a one term President. Not to create more jobs. Not to strengthen our economy. Not the end the war. All they want is the Power of the White House; nothing else matters as much.

  • rate this

    Comment number 151.

    The solution is ugly, but will happen no matter what because the government and the people who the government serves will both be broke and The US will be the laughing stock of the world.

  • rate this

    Comment number 150.

    Third problem is too many American have too much debt and no savings and literally living paycheck to paycheck. If they lose a job, they are less than a month from being homeless.

  • rate this

    Comment number 149.

    the problem is really 4 fold in the US. First, Access to the health system is limited to those who have health insurance, have medicare or medicaid, or have the raw means to pony up all the money to pay their medical cost upfront. The second problem is not only has the Federal Government is too far in debt so is the state governments.

  • rate this

    Comment number 148.

    The USA has had an unlimited credit card (i.e. the world reserve currency status) hence has spent like it has to build infrastructure etc. It has to come to an end sometime.

  • rate this

    Comment number 147.

    In the 50s and 60s the higly regulated financial world in the US and Europe effectively led the world, sure profits were not stratospheric, but boy was the world economy stable. Deregulation made a handful rich and the rest so poor... Whilst the heavily regulated Chinas and Singapores of this world are stable and wealthy. Do you see the common thread there.... Regulation.....

  • rate this

    Comment number 146.

    Then comes the medicine split the banking windows into three zones put all the banking ie real money into one zone and move it every three hours through each window/country which will create three times the real money ie liquidity. To complete the cycle of money we need to create another 5 banking windows  of

  • rate this

    Comment number 145.

    Split USA  and canada into three separate countries each east ,middle and west resp each with 3 hrs time zones and split the deficit into three parts and give to each country. Then comes the medicine split the banking windows into three zones put all the banking ie real money into one zone and move it every three hours through each window/country which will create three times the real money ie

  • rate this

    Comment number 144.

    the cycle of money we need to create another 5 banking windows  of 3 hrs each( which means russia and china being split into more countries) around the world to complete the 24 hr banking cycle. Full idea is on http://www.credit-crunch.synthasite.com copyright 10/10/2008 mr m s al-memani
    Sent from my iPhone

  • rate this

    Comment number 143.

    What I don't understand is:
    Americans will not raise the debt ceiling raised, do not want taxes raised (except on the rich, which the Republicans seem to ignore) and do not want their entitlements cut. ??? They already have the least taxed populace in the first world and while they want Everything (police; fire; programs) they do not want to pay for Any of it. What sense does that make?

  • rate this

    Comment number 142.

    The debt ceiling is a bazaar kind of "mother-may-I." Congress orders the executive to take action, and then when the executive has to pay for the actions it was ordered to take, they must ask permission all over again.
    Greece got into trouble with it's lenders. USA is in trouble with a particularly fact-impaired faction of its own government. USA's position is easier to fix, if we find the will.

  • rate this

    Comment number 141.

    I think there is some misconception about Social Security and Medicare as issues in the current budget debate. While it is true the payments out are massive, these programs are totally funded by deductions from workers wages. The problem is that the government has, over the years, "borrowed" these funds. I don't know if I'm an average american but I say cut war funding not the lives of seniors.

  • rate this

    Comment number 140.

    14 trillion dollars amounts to the net worth of some countries. This debt will NEVER be repaid. This holds true for most if not all nations on the Earth. Why not write off everyone's debts on 31 December 2011? We start again using prudent economic policies and forbid the carrying of deficits. Make countries behave like people who don't have credit; live within your means.

  • rate this

    Comment number 139.

    Perhaps it would be prudent on the part of American elite who have made money as brokers, lobbyists, middle-men transacting between government and the common man should pay back voluntarily, failing which the government should legislate in such a manner that all that money in the hands of middle-men go to the common man and providing a second lease of life for the country. Otherwise nobody exists.

  • rate this

    Comment number 138.

    If it is illegal to exceed the debt ceiling, who would get sued?

  • rate this

    Comment number 137.

    Western peoples beware the tide may be turning, As a member of "western civilisation" haven't felt much sympathy for our situation during the downturn, I've accepted that we have wrought the seeds we've sown. We are dependant of eastern manufacturing so has lead us to a sped up game of economic Russian roulette in which China is handling the ammunition for the gun. Just hope our chamber is empty.

  • rate this

    Comment number 136.

    This is all Political maneuvering. The Dems want the Repubs to make a public vote to uphold tax breaks for the rich before the election season.
    Even among right wing friends, I hear, "Why shouldn't someone pay more taxes if they're making more than 200,000 dollars per year.

    Eventually, the poor working conservitive fools voting for Repubs will awake and see Repub's only represent the elite.

  • rate this

    Comment number 135.

    The Article is absolutely saying Natural truth of current Global financial system but some might object to hard truths which will be difficult for them to accept that many countries would be in bail out stage if the decision was not taken in objective manner


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