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Debt limit: What's the fuss?

chart_debt_ceiling_v2.top.gifBy Jeanne Sahadi, senior writer


NEW YORK (CNNMoney.com) -- Before closing shop for the year, the Senate on Thursday raised the debt ceiling by $290 billion.

That's good: The government needed to act so it can keep borrowing the money it needs to pay the bills.

And $290 billion sounds like a lot of money. But it's not really. In fact, it's only expected to cover the Treasury's borrowing needs through mid-February.

During fiscal years 2008 and 2009, the ceiling needed to be raised three times - from $9.815 trillion to $12.104 trillion. If the $290 billion increase is enacted into law, the new ceiling would be $12.394 trillion.

The short-term increase means lawmakers are punting to early next year what is on track to be a knock-down, drag-out fight over which party is more irresponsible and how to address the country's growing fiscal problems.

In the meantime, there are practical matters regarding the debt ceiling that lawmakers can't afford to ignore.

What's the problem exactly?

The ceiling reflects the level up to which the Treasury is allowed to borrow.

If the ceiling is ever breached, the country would effectively be in default. That can hurt bonds, the dollar and creditors' portfolios. In the universe of financial things to avoid, it ranks as a "no good, very bad" event.

Senate Budget Chairman Kent Conrad, D-N.D., has said default would be "catastrophic."

The Congressional Research Service put it a little less emotionally in a report on the history of the debt limit.

"Although not all the possible consequences of a government default are known, it would mean that the government could no longer meet all its obligations," the service wrote. "Not only the default, but the efforts to resolve it would arguably have negative repercussions on both domestic and international financial markets and economies."

The country's debt level is currently within kissing distance of the $12.104 trillion ceiling. It stood at $12.044 trillion as of Dec. 21.

No one can say for sure which day the ceiling would be breached because the amount of debt subject to the limit can fluctuate up or down on any given day. Treasury has said that the debt is very likely to hit the limit by Dec. 31.

The expectation is that lawmakers would never let the country go into default. But that doesn't mean they don't sometimes, as one budget expert put it, "hold themselves hostage" until the 11th hour and 59th minute before deciding to raise the ceiling.

In the past, Congress sometimes hasn't voted for an increase until the debt was just $25 million below the ceiling. In borrowing terms, that's a New York minute.

While lawmakers raise the ceiling when they need to, it's a tough political vote because there's a lot of damning rhetoric thrown around during the debate, usually by the minority party at the majority party accusing them of being spendthrifts.

Truth is, both parties are to blame for the debt predicament.

What happens when debt hits the limit?

Treasury officials are in touch with congressional leaders daily about the debt ceiling issue.

The day the debt actually hits the ceiling, the Treasury will alert congressional leaders that it will start using various cash management moves to keep the country from default for a short while.

In the past, a "short while" could mean as much as several months. Today it means no more than a few weeks and possibly a few days because the government's financing needs have grown so large in the past two years.

"The tools haven't grown as the deficit has grown," a Treasury spokesman said.

Just how long the Treasury can stave off default depends on when a breach occurs. "It's hard to say exactly when we'd run out of cash," he said.

If the ceiling is hit on Dec. 31, as Treasury expects, the agency's juggling act won't hold up very long. That's because the borrowing needs of the country will be most onerous at the end of the month.

Here's why: On Dec. 31, the Treasury will need to record as debt the amount of money it has borrowed from the Social Security and Medicare trust funds over the past several months. (Yes, the government borrows the surplus revenue from the funds, and has done so for years.) At the start of January, Social Security checks and veterans' benefit checks will need to be sent out.

So those two factors combined will quickly deplete the resources Treasury has to prevent default.

That's why the Obama administration has been pressuring lawmakers to deal with the debt ceiling increase promptly. If the Senate does what it says it will, Treasury will find a higher debt ceiling under the tree on Christmas morning.

Are you stuck in a lousy 401(k) plan at work but want help maximizing your retirement savings? Send us an email at
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