Date: 08 Oct 2013, Economics and Finance
Question setter: Mettletest Panellist

US debt ceiling - default?

Will the US Congress agree to raise the US Government's borrowing limits, the "debt ceiling", by the Treasury's deadline of October 17th, avoiding a debt default?


Answer: Yes
Confidence level: 30%
Mean confidence level (all requests): 35.00%

The risk of default is ultimately not one that the US will be prepared to take. Although the rhetoric and intransigence of both parties appears quite rigid currently, there is hard work going on behind the scenes to find a formula that will break the deadlock. Obama may make some spending cut pledges outside the healthcare realm, congress may only of a temporary lifting of the cap. Whatever the fudge decided upon, the deadline will not be breached.

Outcome: Yes
Score: 30
Mean score (all respondents): 35.00

Expert opinion:

Answer: Yes

Selected Expert Answer from Mettletest Panellist:
There is an alarming state of brinkmanship, enough for governments, banks and the IMF all to be making representations to the US not to allow default. Ending the crisis is in the hands of the Republican Speaker, John Boehner. He has been fighting hard to win concessions from President Obama over healthcare and other programmes with no success. It is already pretty clear that these concessions will not be forthcoming and the Republicans are suffering in the polls for their continuing efforts to extract a ransom. The problem for Boehner is the tenacity of the Tea Party wing, which will almost certainly force him out of the speakership if he backs down. Will he make the sacrifice for his country (and probably for the sake of his party's long-term health too)? The markets are betting he will or that there will be some fudge that will avert catastrophe. There have been minor jitters, so far, in reaction to the stand off, The White House seems to be offering the possibility of only a temporary lifting of the cap, which might save some face. I too stand with that market view. It is barely credible that a man would risk the despair and disgust of the world and the future of his country, merely to postpone his own political fall, which would surely follow.

Answer: Yes

Selected Expert Answer from John Karslake:
The debt ceiling will be raised because both Congress and the president know that the risks of default are simply too high. Currently we have Speaker Boehner being kept resolute by the Republican party and especially the Tea Party wing hard behind him with a knife in his back. He is attempting to deflect President Obama from his flagship healthcare policy in return for the votes to raise the debt ceiling. Obama sees the public on his side and has no battle for re-election. There is little chance he will give way. Boehner would take the blame if he drives the US over the brink but will lose support in the party and probably the speaker's chair if he relents. Rhetoric has toughened and positions become more entrenched over the last few days but these are the last the final throes of the fight. With ten days still to go before the deadline, both sides want to appear immoveable to produce a back down from the other. I believe, and we all have to hope, that behind those rigid fa├žades the compromises are being prepared to avoid the disaster of default. We may have to wait to the last moment to see a flinch but it will come.

Answer: No

Selected Expert Answer from Mettletest Panel:
There is no doubt that a default could be catastrophic for the US and destabilise the whole world economy. The consequences for the dollar, as the reserve currency, and the massive holdings of US government debt are unpredictable but they are not going to be good. The question is just how great an economic slowdown would be caused and whether it will lead to a real ongoing decline in US power and fortunes. The problem is that many Republicans are briefing that the danger is not as imminent as the Treasury claims - it's a government bluff. If they can keep speaker Boehner, who fears for his job if he concedes, holding firm they may push beyond the October 17th deadline. Some strong convincing needs to be done that the deadline is real, probably supported by stock-market falls and worsening opinion polls. It is increasingly likely that the Republicans will not be swayed in time and that Obama will not make them the concessions they want on healthcare, so the deadline will be breached.

Outcome: Yes

Comment on outcome from Mettletest Panellist:
The USA stepped back from the brink in the final hours before the deadline. The debt ceiling was lifted, on a temporary basis until February 2014, and immediate default was averted. The markets had anticipated this would be the case and begun to rally in the preceding days with a continuing relief rally once the deal was struck in Congress. One of the reasons for the market's apparent sanguineness, even in US Treasury Bills vulnerable to default, was that there is no obvious alternative in which to invest those huge sums of money. One long-term consequence of the trauma may be that global investors seek harder to find those realistic alternatives. Now there is some post deal optimism. The Republican party has been blamed by the American people for inflicting damage on the US economy and it's felt that they will not risk another fight that paralyses government again. Republicans have declared a switch in tactics to thwart "Obamacare", the key reason for the blockage. They will now go for aggressive oversight to force changes. Outside this, they will want to avoid more cuts in the defence budget, so there will be a need to keep the funds flowing and some common ground on that with the Democrats. There is little time to construct deals, the debt problem is far from solved and new deadlines will be looming in the New Year. For now, however, a default crisis has been averted.