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U.S. budget showdown drives up borrowing costs

Speaker of the House John Boehner makes a statement outside his office to respond to President Barack Obama’s comments on the budget showdown.

J. SCOTT APPLEWHITE/AP

America's short-term borrowing costs have started rising, the clearest sign yet that Washington's budget wrangling is taking a toll on investor confidence, as some of the world financial system's most important players arrive in the city for annual talks.

The Treasury Department was forced to offer the highest rates since the financial crisis to lure buyers for $30-billion (U.S.) in one-month bills Tuesday. At 0.35 per cent, the rate doesn't look like much. However, it usually costs the U.S. a negligible amount to borrow for short periods because U.S. debt is considered the safest investment in the world.

But with some Republican politicians openly expressing a willingness to risk a default to win concessions from President Barack Obama, that calculation is starting to change. The one-month rate the Treasury was forced to pay Tuesday was double that for comparable securities, according to Bloomberg News.

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The jump in short-term borrowing costs came as Mr. Obama and Republican House Speaker John Boehner appeared to harden their positions.

Both held press conferences in Washington Tuesday that offered no indication that they were any closer to an agreement that would end a shutdown of non-essential government services. Those closings started more than a week ago, after Congress failed to renew the government's spending authority unless Mr. Obama agreed to delay the implementation of his Affordable Care Act, also known as Obamacare.

The brinksmanship instead is shifting to the federal government's debt ceiling, which the Treasury says could be breached as soon as next week. The loss of borrowing authority would force the government to miss payments, which would constitute a default. That raises borrowing costs because investors want a higher yield to account for the risk that they won't get paid.

"We aren't going to calm investors until Speaker Boehner brings up a bill," said Mr. Obama, referring to his demand that House Republicans join the Democrat-led Senate in supporting legislation that would reopen the government and raise the debt ceiling without conditions attached.

"Until they do that, there is going to be a cloud over U.S. economic credibility," the President added.

As the President spoke, hundreds of the most powerful men and women in the international financial system started to arrive in Washington for the annual meetings of the International Monetary Fund and the World Bank this weekend. The Institute of International Finance, a Washington-based association that represents 450 financial institutions from 70 countries, will hold concurrent meetings.

A senior Canadian Finance official, who briefed reporters on the Washington meetings Tuesday on the condition of anonymity, said the government shutdown and debt ceiling would dominate the agenda. The IMF's chief economist, Olivier Blanchard, warned that a U.S. default would "almost surely" derail the country's recovery and could lead to serious turmoil in international financial markets.

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"I hope the U.S. Congress will find a solution before the time limit," Thomas Jordan, chairman of the Swiss National Bank, told an audience in Washington Tuesday. "It's in the interest of the world economy … that we do not again have a disruption in financial markets form this debt-ceiling issue."

In August, 2011, Congress and the President resolved their differences over the borrowing limit at the 11th hour. That wasn't soon enough to avoid days of market volatility. Standard & Poor's, the credit-rating agency, stripped the U.S. of its triple-A credit rating.

Republican Rob Portman, a former member of George W. Bush's cabinet who now serves in the Senate, is floating the idea of pairing an increase of debt limit with an agreement to overhaul the tax code, an issue that both Democrats and Republicans say they want to tackle. At the same time, the Democratic leadership in the Senate is preparing legislation that would raise the debt ceiling with no strings attached. The rub with that plan is Majority Leader Harry Reid needs to round up about six Republican supporters to avoid procedural delays.

Both Mr. Boehner and the President shifted slightly Tuesday.

Mr. Boehner held a press conference with fellow Republicans and avoided references to Mr. Obama's health plan, which could be an attempt to back away from using budget negotiations to impede Obamacare. The President said he was open to a formal budget negotiation in return for a temporary extension of the government's spending authority and a higher debt ceiling.

To be sure, these are signs of progress only to the most optimistic. The overall stance of both sides remained intransigence.

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"I want to have a conversation," Mr. Boehner said. The President said he would have one as soon House Republicans stop threatening to allow the government to default. Mr. Boehner refused to give up his leverage.

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About the Author
Senior fellow at the Centre for International Governance Innovation

Kevin Carmichael is a senior fellow at the Centre for International Governance Innovation, based in Mumbai.Previously, he was Report on Business's correspondent in Washington. He has covered finance and economics for a decade, mostly as a reporter with Bloomberg News in Ottawa and Washington. A native of New Brunswick's Upper St. More

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