Federal default averted by debt limit action

In mid-February, Congress passed and the president signed into law an increase of the nation’s debt limit, averting a potential national credit crisis that would have depressed the country’s economy.

The measure, which narrowly passed the House before being approved by the Senate, extended the nation’s capacity to pay its debts for one year, through March 2015. The debts have already been incurred and authorized by Congress, but congressional action is required to increase the Treasury’s capacity to pay them.

In the days preceding the House vote, House Speaker John Boehner indicated that any debt ceiling increase would have to be tied to deficit reduction measures, but he later dropped the demand and agreed to pass a “clean” debt ceiling increase independent of other policy measures.

Treasury Secretary Jack Lew had indicated that the nation would be unable to pay debts after Feb. 27 without an increase in the ceiling. By raising the debt limit well in advance of Feb. 27, Congress averted a possible downgrade of the nation’s bond rating.

In 2011, the national bond rating agency Standard & Poor’s downgraded the nation’s rating from AAA, the highest possible rating, to AA+ as a result of the political fight over the debt ceiling increase. Such a downgrade can drive up interest costs on U.S. debt.

Municipal leaders across the nation called on Congress to act quickly to raise the debt ceiling and protect the economy from the financial disaster that would result from a default.