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Q&A: Why breaking federal debt limit sparks fear

  • In this Monday, Oct. 7, 2013, file photo, the Capitol in Washington is seen under an overcast sky at dawn. If the deadline to raise the government's borrowing limit is breached, no one knows precisely what will happen. (AP Photo/J. Scott Applewhite, File )

WASHINGTON — Here's the scariest thing about the looming deadline to raise the U.S. government's borrowing limit: No one knows precisely what will happen if the limit is breached.

It's never happened before.

The possible consequences are dizzyingly complex. But they're all bad. Most ominously, the government might fail to make interest payments on its debt. Any missed payment would trigger a default.

Financial markets would sink. Banks would slash lending. Social Security checks would be delayed. Eventually, the economy would almost surely slip into another financial crisis and recession.

Even if the government managed to make its interest payments, fears about a default would likely cause investors to dump Treasurys and send U.S. borrowing rates soaring.

The financial world is holding out hope that that grim scenario will compel Congress to raise the debt limit and avert a default. Here are questions and answers about the government's borrowing limit:

Q. What exactly is it?

A. The borrowing limit is a cap on how much debt the government can accumulate to pay its bills. The government borrows by issuing debt in the form of Treasurys, which investors buy. The government must constantly borrow because its spending has long exceeded its revenue. The first borrowing limit was enacted in 1917. Since 1962, Congress has raised the borrowing limit 77 times. It now stands at $16.7 trillion.

Q. How close are we to the limit?

A. The national debt actually reached the limit in May. Since then, Treasury Secretary Jacob Lew has made accounting moves to continue financing the government without further borrowing. But Lew says those measures will be exhausted by Oct. 17. The government will then have to pay all its bills from its cash on hand — an estimated $30 billion — and tax revenue. The cash and tax revenue aren't likely to be enough. Lew has said the government's daily spending can run as high as $60 billion.

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