Congress has 12 working days to avoid an economic disaster — and there’s good reason to panic

• House Speaker Paul Ryan and Senate Majority leader Mitch McConnellMark Makela/Reuters

  Congress has 12 working days to raise the nation’s debt ceiling when it returns in September.

• Failure ot raise the debt limit would cause severe economic and political consequences.
• Negotiations have been sluggish, with one Democratic aide saying there are currently “no talks” ongoing.

Congress, in the midst of a month-long August recess, faces a massive policy threat when lawmakers return to Washington next month.

By the end of September, Congress must approve legislation to raise the nation’s debt ceiling — or risk a goal economy disaster. And it already sounds like the attempts at a compromise aren’t going well.

The Treasury Department says the debt ceiling, a statutory limit of outstanding debt obligations that the federal government can hold, must be raised by September 29. That gives Congress 12 working days to pass legislation to get to President Donald Trump’s desk.

The Congressional Budget Office puts the deadline slightly later in mid-October.

If breached, it could lead to disastrous consequences for the federal government, the US economy, and the global financial system. If the debt ceiling is not raised, the federal government would lose the ability to pay bills it already owes in the form of US Treasury bills and could lead the US to default on some of that debt.

The possible fallout from a default, according to a study by the Treasury Department, would include a meltdown in the stock and bond markets, a downgrade of the US’s credit rating, which would increase the government’s borrowing costs, and the undermining of the full faith and credit of the country.

Despite potentially dire consequences, there is confidence but no guarantee that factions in Congress, with a variety of competing interests, will be able to come together on a deal to raise the limit.

Currently, the two sides do not appear to be close on a deal.

“There are no talks going on right now,” one senior Democratic congressional aide told Business Insider.

Despite this, there is hope that the two sides will be able to avoid the worst case scenario.

“I think we will avoid a default,” one Republican aide told Business Insider. “I think we might have one attempt that fails and then we have to come back and do something else.”

A similar sentiment was expressed by outside analysts and economists.

“We think most policymakers are aware of the severe political and economic consequences of a failure to raise the debt limit. But September could be an anxious month for market participants,” Nancy Vanden Houten, a senior economist at Oxford Economics, wrote in a note to clients this week. “There are just 12 full days on the legislative calendar, and there is no clear legislative path as of yet for a debt limit hike.”

Clean or dirty?

The biggest fork in the road for the debt ceiling comes over whether to pass a “clean” increase, a move favored by the Trump administration, many Republicans, and some Democrats, but opposed by many conservatives. A so-called clean increase would either suspend the debt limit for a certain time period or increase it to a set amount of debt.

Democrats favored “clean” hikes throughout the Obama administration, and Democratic leaders came out for a clean hike in June.

Republicans, on the other hand, consistently demanded spending cuts or other reforms to slow debt accumulation throughout the Obama-era debt ceiling fights. And many conservative members still expect those measures to be included in any limit increase bill.

“Our nation’s structural deficit is driven by historically irresponsible levels of federal spending,” said a statement from Heritage Action, the political arm of the Heritage Foundation. “Any increase in our nation’s debt ceiling should be paired with serious spending reforms that begin reducing federal spending in real, meaningful ways. Congress cannot simply kick the can down the road to the next generation.”

That presents significant complications for congressional Republican leadership.

Any bill would need 60 votes in the Senate, meaning eight Democrats would have to get on board if every Republican supports the legislation. Since spending cuts likely represent a poison pill for Democrats, a clean bill could be the only thing that passes in the upper chamber.

On the other hand, losing conservative members in the House by stripping out spending cuts could make it difficult for it to get through that body.

Early signs have suggested that the GOP leadership tandem House Speaker Paul Ryan and Senate Majority Leader Mitch McConnell will propose a clean hike for debt ceiling, hoping to win over some Democrats even as they will likely lose the far-right flank of their own party.

That path, however, would be fraught with political complications.

Earlier this week, Matt Fuller at HuffPost reported that many House conservatives are close to rebelling against Ryan if he brought forth a “clean” bill.

One Republican in the House told Fuller that if Ryan attempts to go that route, “it becomes the start of the end for the Ryan speakership.” And several other conservatives members said they wanted to see serious efforts to deal with debt accumulation in the legislation.

Rep. Mark MeadowsMark Wilson/Getty Images

There were some promising signs toward compromise last week when Rep. Mark Meadows, head of the conservative House Freedom Caucus, appeared to slightly soften his stance on including spending cuts in the debt ceiling package.

“I don’t believe we should play around with the full faith and credit of our country — I’m bullish on getting it done,” Meadows told Bloomberg.

But the Freedom Caucus took an official position in May that they would not support a limit increase without policy concessions. Meadows told HuffPost that he proposed several items for potential inclusion to GOP leadership.

A source close to the House Freedom Caucus told Business Insider the approach that is “gaining a bit of steam” is to write a law to formalize Trump’s executive order that for every one regulation added, there must be two repealed.

“A simple, clean raising is not something our members are going to be able to get behind,” the source said. “And keep in mind, that for the last eight years Republicans have criticized Democrats for clean increases for the debt ceiling. This is something from across the conference, not just the super-conservatives, we’ve taken issue with.”

Any attempt at a clean hike would lose the support of the Freedom Caucus, said the source. There are roughly three dozen members in the Caucus.

On the Senate side, negotiations appear equally far apart.

Treasury Secretary Steve Mnuchin met with both McConnell and Minority Leader Chuck Schumer prior to the recess, and the two sides were unable to approach an agreement.

According to Ben White at Politico, Schumer was hesitant to perform the political heavily lifting with a clean debt ceiling raise because of the coming Republican effort on tax reform. The party’s tax plan, set to be opposed by Democrats in large numbers, would likely contribute to the deficit. Some Democrats have pushed for getting something in return for a debt ceiling hike, like guaranteeing key payments for insurers under the Affordable Care Act.

Additionally, some Republican senators are skeptical about any clean raise.

“If there’s ever a good example of kicking the can down the road, it is continually raising the debt ceiling and not dealing with the cause of the debt,” Steve Daines, a GOP senator from Montana, told Politico. “So it concerns me greatly that it’ll just be another punt if we don’t do anything, at least some structural reform.”

In the end, however, most strategists expect that a clean raise with a combination

Michael Steele, a Republican strategist at Hamilton Place Strategies and press secretary for former House Speaker John Boehner, said that the importance of raising the debt ceiling will probably win out.

“At the end of the day there will likely be a bipartisan deal to raise the debt ceiling without much drama,” Steele told Business Insider.

Evan Vucci/AP Images

The Trump factor

As Business Insider’s Akin Oyedele wrote last week, Wall Street and investors are starting to get nervous about a potential default.

And another factor that could complicate the process is Trump and his administration, which until last week was split on how it approached the issue.

Mnuchin favors a clean increase. But Mick Mulvaney, the director of the Office of Management and Budget and former member of the House Freedom Caucus, advocated for spending reforms to be attached. Other administration officials were suggesting cuts were on the table.

Mulvaney finally ceded the argument publicly, telling reporters that the Treasury secretary was the point person on the negotiations and that he favored a quick resolution to the issue.

But even with the late unification on strategy, the president could still pose a threat to the nascent negotiations. Trump’s habit for going off script and accepting unorthodox policy proposals could undermine any potential agreement.

“With President Trump, debt ceiling options like the Platinum Coin and the 14th Amendment — while unlikely — are now at least a possibility,” said Chris Kruger, an analyst at Cowen Washington Research Group wrote ina recent note to clients.

“You also have Twitter risk, Trump’s personal/business history with debt, and his comments during the election about restructuring the nation’s debt (hair-cutting Treasuries?) that combine to make this a volatile DC-created tail risk,” he added.

Justin Sullivan/Getty Images

Trump’s relationship with top Republicans has become strained amid the failed healthcare negotiations. Trump and his aides are openly attacking McConnell on Twitter for the healthcare failure.

And House members were irked by the president calling the politically unpopular bill they passed “mean.”