Obama Says Debt Default May ‘Unravel’ Global Financial System

May 15, 2011, 1:33 PM EDT By Roger Runningen and James Rowley

(Adds Boehner comments starting in fifth paragraph.)

May 15 (Bloomberg) -- President Barack Obama said failure to raise the U.S. debt ceiling by early August might disrupt the global financial system and plunge the nation into another recession.

If investors “around the world thought the full faith and credit of the U.S. was not being backed up, if they thought we might renege on our IOUs, it could unravel the entire financial system,” Obama said on a segment taped for today’s “Face the Nation” program on CBS. “We could have a worse recession than we’ve already had.”

Obama is reaching out to Republican and Democratic lawmakers to win approval of an increase in the debt ceiling. The government projected this month that the $14.3 trillion debt limit will be reached tomorrow. Treasury Secretary Timothy Geithner says that while he can juggle accounts for a time, he will run out of options for avoiding default by early August.

Republicans including House Speaker John Boehner of Ohio and Senate Minority Leader Mitch McConnell of Kentucky are seeking trillions of dollars of spending cuts and no tax increases in exchange for supporting a higher debt limit. Obama on April 13 proposed a long-term deficit-reduction package of about $4 trillion over 12 years. It includes $2 trillion in spending cuts, $1 trillion in tax increases and $1 trillion in reduced interest payments.

‘Totally Irresponsible’

Boehner, who in a May 9 speech demanded spending cuts greater than the amount of any debt-ceiling increase, said today that he understood “what the president was saying about jeopardizing the full faith and credit of the United States.”

“Our obligation is to raise the debt ceiling,” he said on CBS’s “Face the Nation.” “But to raise the debt ceiling without dealing with the underlying problem is totally irresponsible.”

Obama appointed Vice President Joe Biden to lead negotiations with congressional leaders to try to strike a deal on reducing debt and deficits. The small group of negotiators has met three times with Biden. The president held separate talks with Senate Republicans and Democrats May 11 and May 12.

“I’ve said, ‘Get them in a room, hammer out a deal, and make sure that we don’t even get close’” to defaulting on the nation’s debt, Obama said.

Debt reduction must be “balanced” and include tax increases, Obama said.

‘Shared’ Burden

“Are we going to make sure no single group -- not seniors, not poor folks, not any single group -- is carrying the whole burden? Let’s make sure the burden is shared,” Obama said on the CBS program, which was taped May 11 in Washington for broadcast today.

Obama said he would resist cuts in such areas as medical research; infrastructure such as roads, bridges or railroads; or college loans for needy students.

“My hope is that Congress is going to say, ‘This is so serious, we can’t play politics with it,’” Obama said. “Have faith that usually after trying everything else, we end up doing the right thing.”

Obama’s statement “makes me think he is really not serious about tackling the big problems that face our country,” Boehner said. “He’s talking about it, but I am not seeing real action yet.”

Still, Boehner said he was optimistic that the talks led by Biden would yield an agreement on legislation to cut spending and extend the government’s borrowing authority.

‘Opportunity to Act’

“We don’t have to wait to the eleventh hour” like Congress did last month to extend federal spending and avoid a government shutdown, Boehner said. “But I am not going to walk away from this moment” of “opportunity to act” to make serious spending cuts, he said.

“At the end of this process, it’s going to have to come to that,” Boehner said of extending the government’s borrowing authority.

The speaker said that “for quite a while” he has privately discussed with Obama his idea for making drastic spending cuts and changes in entitlements like Medicare and other programs in tandem with raising the debt ceiling.

Boehner said he told Obama, “‘Let’s lock arms and jump out of the boat together.’ I am serious about dealing with this. And I hope he is just as serious.”

One of Boehner’s predecessors as House speaker, Republican presidential candidate Newt Gingrich, said on NBC’s “Meet the Press” that Congress should “avoid default if you possibly can” but that the president shouldn’t get “a blank check.”

McConnell, appearing today on CNN’s “State of the Union,” said he wants extension of the debt limit coupled with broad- reaching fiscal reforms.

“We need to do something significant,” he said. “We need to impress the markets, impress foreign countries that we’re going to get our act together, and astonish the American people that the adults are in charge in Washington and are actually going to deal with this issue.”

--With assistance from Laura Litvan in Washington. Editors: Leslie Hoffecker, Andrea Snyder

-0- May/15/2011 17:11 GMT

To contact the reporters on this story: Roger Runningen in Washington at rrunningen@bloomberg.net; James Rowley in Washington at jarowley@bloomberg.net

To contact the editor responsible for this story: Mark Silva at msilva34@bloomberg.net

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Geithner Says Damage From Debt Default May Be ‘Irrevocable’

May 14, 2011, 2:06 PM EDT By Ian Katz and Daniel Enoch

(Updates with Bennet’s comment in final two paragraphs.)

May 14 (Bloomberg) -- U.S. Treasury Secretary Timothy F. Geithner said a default arising from failing to raise the debt limit could cause “irrevocable damage” to the economy, risk a “double-dip” recession and increase unemployment.

“Default would not only increase borrowing costs for the federal government, but also for families, businesses and local governments -- reducing investment and job creation throughout the economy,” Geithner said in a letter dated yesterday to Senator Michael Bennet, a Colorado Democrat.

Failing to raise the $14.29 trillion debt ceiling would “force the United States to default” on obligations such as payments to service members, citizens, investors and businesses, Geithner wrote. “This would be an unprecedented event in American history. A default would inflict catastrophic, far- reaching damage on our nation’s economy, significantly reducing growth and increasing unemployment.”

The U.S. is scheduled to reach the debt limit May 16 and can keep borrowing until about Aug. 2 by taking steps that include declaring a “debt-issuance suspension period” under the statute governing the Civil Service Retirement and Disability Fund, Geithner said May 2. That would allow the U.S. to redeem existing Treasury securities held by that fund as investments.

Cuts Debated

Democrats and Republicans are debating how much to trim the deficit and whether to extend the debt ceiling. Senate Minority Leader Mitch McConnell, a Kentucky Republican, said May 12 he wants “significant” near-term cuts in federal agency budgets paired with longer-term reductions to programs like Medicare and Medicaid in exchange for his support for an increase in the debt limit.

“Even a short-term default could cause irrevocable damage to the American economy,” Geithner said in response to a letter from Bennet requesting an estimate of the consequences of failing to increase the limit.

Raising the debt ceiling “does not authorize new spending commitments,” Geithner said. “It simply allows the government to finance existing legal obligations that Congresses and presidents of both parties have made in the past.”

In response to Geithner’s letter, Bennett said it was “absolutely urgent and essential” that lawmakers draft a plan that “materially reduces the deficit.”

Still, “playing politics with the debt limit would rattle the capital markets, blow an even bigger hole in our deficit and would likely throw our economy into another deep recession,” he said in an e-mailed statement.

--With reporting by Phil Mattingly in Washington. Editors: Daniel Enoch, Sylvia Wier.

To contact the reporters on this story: Ian Katz in Washington at ikatz2@bloomberg.net;

To contact the editor responsible for this story: Christopher Wellisz at cwellisz@bloomberg.net

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