Debt ceiling: Danger ahead

NEW YORK (CNNMoney) -- The debt ceiling is one deadline lawmakers really can't afford to blow.

But they now have raised the risk of doing just that.

With the passage on Thursday of yet another temporary spending measure to fund the government for three weeks, lawmakers jacked up the prospect for trouble by stoking the likelihood of fiscal brinkmanship.

As a result, they could fail to raise the country's legal borrowing limit before it's reached, or they could raise it just in time but in a manner that unsettles markets.

Either situation could create new problems for the U.S. and global economies.

The latest funding bill will expire April 8. Between now and then Democrats and Republicans will have to find some compromise on funding levels for the rest of this fiscal year or risk a government shutdown.

The Treasury Department, meanwhile, now estimates that the debt ceiling could be hit between April 15 and May 31. If it's not raised, Treasury will not be allowed to borrow and therefore will not be able to pay the country's bills in full without taking drastic measures to cut spending or raise taxes.

Not insignificantly Congress will be out of session next week and the last two weeks in April.

In the past, Congress has always ended up raising the cap, if sometimes at the last minute. And some policy experts think they will do so again, but there's no guarantee precedent will hold.

How did we get to this ridiculous crossroads? Simple. Lawmakers failed to do their jobs.

Both parties have punted for years on the issue of fiscal responsibility, mostly passing bills that added -- often significantly -- to the country's debt load.

Then, Democrats last year failed to pass a budget for fiscal year 2011. That teed-up Republicans -- who now control the House -- to cloak themselves in fiscal self-righteousness and call for a record level of spending cuts this year. The magnitude of those cuts, some highly ideological in nature, are considered unwise by Democrats and even some deficit hawks given the still-modest economic recovery.

"If the conservative Republicans don't get what they want on negotiations over the [2011 funding bill], the drumbeat to draw the line even more sharply on the debt limit grows," said political observer Norman Ornstein, a resident scholar at the conservative American Enterprise Institute.

Maybe they will agree to a small -- i.e., short-term -- increase in the debt ceiling with an agreement to negotiate a long-term deficit deal, Ornstein suggested, although "even that might not work."

Treasury, meanwhile, will do everything it can "to put off the day of reckoning and hope members come to their senses," he added. "But the dynamic I see now still makes a debt ceiling breach a real possibility."

That won't get much love from the markets.

"The debt ceiling can be addressed in the next several weeks, but the market won't tolerate cutting [it] too close to the line," said Jim Vogel, head of interest rate strategies at FTN Financial.

Sen. Pat Toomey, a Republican, tried to pass a bill that would require Treasury to use revenue to pay interest owed to bond investors first to allay concerns that the country might default on its obligations if the debt ceiling isn't increased in time.

Federal Reserve Chairman Ben Bernanke has said that really won't do since the amount of revenue coming into the government at any given time won't necessarily match up to the amount of interest owed in a given month.

Plus, the market perception of such targeted interest payments may not be as benign as Toomey assumes.

"The impact to the Treasury market would likely be quite destabilizing," said Calvin Sullivan, chief strategy officer for fixed income capital markets at Morgan Keegan & Co. The Treasury market, he noted, is an anchor for broader financial markets.

As of March 15, the debt subject to the ceiling was $108 billion shy of the $14.294 trillion cap.

Treasury Secretary Tim Geithner, meanwhile, reminded lawmakers this week of the futility of the Kabuki dance that often accompanies debt ceiling debates.

"It's had no value in bringing discipline to fiscal choices of the country in the past," Geithner said at a House Appropriations committee hearing.

That's because the debt limit vote is always separate from the votes on spending bills that create the obligations that Treasury then must fund.

Need proof? The debt limit has been raised 74 times in under 50 years. Ten of those increases have occurred over the past decade, when there has been a record run-up in debt.

And here's the thing: If lawmakers are really interested in long-term fiscal responsibility, they could do something novel, like sit down and address it without upending everything in the process just to score political points.