US to default on Thursday?

The measure to suspend the federal debt limit passed by Congress in 2015 expires on Thursday, March 16, prompting calls for lawmakers to approve legislation to raise the statutory limit.

The debt limit is the legal amount that the US government is permitted by Congress to borrow for paying the administration's bills such as interest on the national debt, social security costs and salaries to military personnel.

As part of a budget deal in 2015, Congress suspended the ceiling for two years, meaning there is currently no set limit.

At the time of passing that measure, the US national debt limit stood at $18.1 trillion (17 trillion euros).

Over the past two years, however, the nation's debt has risen by an additional $1.8 trillion, according to the Congressional Budget Office. That means Congress will need to reset the limit to about $20 trillion to reflect the current US national debt.

To respond to the situation, the US administration and Congress have three possible choices ahead of them: The first involves lawmakers agreeing to a higher debt limit before the suspension measure expires. The second option is for Congress to extend the current suspension. The last alternative requires Treasury Secretary Steven Mnuchin to use "extraordinary measures" to buy time until the fall and hope lawmakers would reach an agreement in the meanwhile. Mnuchin has already declared that he would temporarily suspend the sale of treasury bonds.   

The last time the US faced a similar situation was in March 2015, under Barack Obama's presidency. At the time, Obama's administration employed "extraordinary measures" to fund government activity and interest payments until legislators relented and agreed to a last-minute lifting of the cap.

A role reversal?

Strictly speaking, from Thursday onwards, the government should no longer have any money to spend, potentially leading to the closure of national parks and public services. That would throw Trump's project to "make America great again" into disarray.

Although the Republicans enjoy majorities in both houses of Congress, it would smack of hypocrisy on their part if they easily waved through a relaxation of the debt limit requirements. That's because they were adamantly opposed to raising the debt limit and put up tough resistance to such measures when Obama was president.

Veering off from that tough stance now just because a Republican is in the White House would erode voter trust in the lawmakers. 

The president, meanwhile, faces another tough task: he has to present a plan to Congress outlining how he intends to keep the public deficit and debt from ballooning.

Coming up with a plan that satisfies competing factions even within the Republican Party is a daunting challenge, particularly given Trump's ambitious electoral promises spawning building a wall along the border with Mexico, lowering taxes, spending a trillion dollars on infrastructure projects and dramatically increasing military spending. 

Some in Congress have signaled their willingness to adjust the debt limit accordingly. "Of course, we will raise the debt limit," said Senate Majority Leader Mitch McConell. But he did not mention any specific time frame by when this could be enacted.

Rising rates

The renewed squabbling could have ramifications for the country's monetary policy as well. The US economy currently is in a good shape, reflected in its falling unemployment rate and accelerating inflation. The stock markets have been on an upward trajectory. The positive economic data led to the Fed hiking interest rates by a quarter percentage point on Wednesday. 

And it also signaled that it would continue to raise rates gradually, with Fed members seeing two more rate increases this year.

Hans-Jörg Naumer, a capital market analyst at Allianz Global Investors, says: "The increase in the debt ceiling will eventually come at a time when the US Federal Reserve continues to hold on to its expansive monetary policy.

"Both of them will put upward pressure on prices and push Fed chief Janet Yellen to increase rates more rapidly than what the market is currently pricing."

Michael Menhart, chief economist at Munich Re, reckons: "A potential, temporary boost to growth and inflation could lead to more interest rate hikes in 2017 than initially expected."  

Divergence

That, in turn, is not good news for Donald Trump and his expensive election promises. That's because rising US interest rates also make the dollar stronger.

But a dollar that is too strong makes US exports pricier and American firms less competitive. Trump's plans to reduce the US' massive trade deficits with China, Japan and Germany are hard to realize with a strong dollar. The Fed's interest rate decisions will also have consequences for Europe.

With every rate raise, the interest rate differential between the US and the eurozone widens as the European Central Bank sticks to its zero-interest-rate policy and gigantic bond-buying program. The outcome would be a weakening of the euro to such an extent that the currency's value could fall below dollar parity.

Such a depreciation of the euro area's single currency is likely to be a boon for European exporters as it makes their products more competitive on global markets.

It would also boost EU exports to the US and make imported goods, which President Trump so much dislikes, more attractive for Americans.