4 More Months Until Congress Reaches Debt Ceiling Deadlock

Congress now has four more months to figure out how to avoid hitting the ceiling.

Treasury Secretary Jack Lew speaks at the unveiling of the design of the Raoul Wallenberg Congressional Gold Medal at the Department of Treasury in Washington, Thursday, May 9, 2013. (Charles Dharapak/AP Photo)

Treasury Secretary Jack Lew speaks at the unveiling of the design of the Raoul Wallenberg Congressional Gold Medal Thursday at the Department of Treasury in Washington.

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Just when the debt ceiling fight was looking contentious, the nation is getting a four-month reprieve.

Treasury Secretary Jack Lew told CNBC in a Friday morning interview that the nation will not likely reach the end of its borrowing rope until September. That gives Congress a few more months to come up with an agreement to stave off default, meaning that markets will now have a few more months to breathe easy. But it doesn't mean that lawmakers will come any closer to agreement in September than they are now.

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Lew told CNBC that the one-time, $59.4 billion payment that government-backed mortgage corporation Fannie Mae announced Thursday would give the government more breathing room before it reaches its borrowing limit.

"The statutory debt limit will be reached in just a few days when it expires on May 18, but because of the extraordinary measures that are available and the cash flow that we can predict that it will not be until at least after Labor Day," he said.

However, Lew added that he wants Congress to keep looking for a solution. 

"People shouldn't relax. Congress should deal with this right away. The uncertainty caused by putting this off is not good," he said.

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With the May 18 deadline looming, lawmakers had introduced ideas of how to stave off default, but those efforts have been unproductive. The Republican-controlled House passed a bill on Thursday that would prioritize paying bondholders and Social Security recipients if the government ran out of borrowing authority.

However, Democrats blasted the bill, saying that the U.S. government would still face a hit to its credit rating if it showed any signs of being willing to only pay some of its bills. 

The intense disagreement over the House's latest debt ceiling bill indicates that a wide gulf remains between lawmakers on how to handle the debt ceiling, even though a downgraded credit rating and even the threat of default could severely damage the economy.

Republican lawmakers see the debt ceiling as a way to cap government spending. The GOP in 2011 used the specter of hitting the ceiling to create a deal that cut government spending.

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The fight led voters to lose faith in Congress and also lowered Standard & Poor's opinion of the safety of U.S. treasuries. For the first time ever, the rating agency downgraded the U.S. from AAA, S&P's top rating.

Meanwhile, many Democrats say that the debt ceiling is nonsensical. A group of Democratic Representatives introduced a bill in January that would have abolished the borrowing limit. Many economists agree; in a January survey from the University of Chicago's Booth School of Business, only one of 38 economists disagreed with the notion that the debt ceiling "creates unneeded uncertainty and can potentially lead to worse fiscal outcomes."

While almost no one thinks the U.S. will actually default on its debts, a downgrade could create serious economic problems, says Gary Thayer, chief macroeconomic strategist at Wells Fargo Advisors. The U.S. could face higher borrowing costs, reduced foreign investment, and a weakening dollar if its credit were downgraded, he says.

The prospect of yet more uncertainty in the form of a potential downgrade makes the four-month debt ceiling delay little more than a temporary reprieve before the next fight.

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"All businesses can do is breath a sigh of relief and to that extent, it is helpful," says Joel Naroff, president of Naroff Economic Advisors, in an email to U.S. News.

On the bright side, any fight between lawmakers over the ceiling will likely be a bit less scary than in the summer of 2011, when the European Union and a much shakier U.S. economy made markets all the more easily spooked by an intransigent Congress.

"I don't think we're in quite as critical a situation as the last time we had to deal with this," Thayer says.