Federal Debt Threatens Recovery : Economy: Analysts say it is keeping interest rates high and soaking up capital that could be invested in industry. Meanwhile, there are calls for the United States to provide aid to Eastern Europe.

Swelling government debt threatens to stifle the budding recovery in the United States even as pressure grows for Washington to send aid to Eastern Europe, economists say.

White House officials say the Treasury has no difficulty selling the hundreds of billions of dollars of securities it needs to finance the huge shortfall between spending and income in the federal budget.

But private economists say that process is sowing the seeds of restricted growth by keeping long-term interest rates high and soaking up capital that could be invested in factories or other businesses.

“The government’s become the only game in town both because it’s the safest bet but also because the private sector has not been borrowing during recession,” said David Jones of Aubrey G. Lanston & Co. in New York.

Jones said that keeps interest rates from falling quickly once business picks up and makes it more costly for companies and individuals to borrow.

The most recent figures show that the U.S. deficit in July alone was $40.8 billion, a 58% jump from a year earlier, when it was $25.9 billion.

But July, 1990, was the beginning of a recession that only now has begun to ease. It shriveled profits and threw thousands of taxpayers out of work, widening the deficit to an estimated $279 billion this year and a whopping $362 billion in fiscal 1992, which begins Oct. 1.

A Bush Administration source, who requested anonymity, said there is reason for optimism, provided the spending limits in last year’s budget agreement between Congress and the White House are met.

The accord promised to cut $492 billion out of spending programs over five years.

“If the budget agreement is adhered to, the deficit will decline,” the source said. “Treasury is having absolutely no difficulty in financing this deficit, and it’s having no demonstrable impact on interest rates.”

But he conceded that Administration economists were “somewhat sobered” by a mid-year review that showed the deficit growing swiftly because of lower tax revenues and higher costs for government-paid medical-care programs.

He added that a big chunk of the borrowing was to pay for the bailout of failed savings and loans--which he said will cost $120 billion in 1992 alone.

Some of the costs will be recovered when institutions are reorganized and sold back to investors, lightening the drag on the taxpayer. “Fortunately, there’s a finite supply of sick S&Ls;,” he said.

The likely need to offer financial aid to the Soviet Union, which remains in political turmoil and will need foreign aid for food, can be met without violating the budget agreement, the source said.

It will take another accord between Congress and the White House, but the “Soviet aid theoretically could be added by amendment to the agreement to transfer some of the cap (on spending) from defense to international.”

In view of President Bush’s call for a New World Order, some see the United States under obligation to help Eastern European nations emerging from communist domination.

Jones cautioned that U.S. financial institutions, from insurance companies to credit unions to investment banks that carry insurance on brokerage accounts, could also require government help that will strain taxpayer finances.

“No matter where you look, there’s danger that may require a government backup as we unwind the excesses of the 1980s at a time when financial institutions face the greatest pressure on them since the 1930s,” Jones said.

The risk is that many investors are buying government securities to finance America’s debts only because they doubt that there will be a sustained recovery and sufficient reason to invest in industry.

The result is that less capital is going into expanding productive operations, Jones said. “That means that things may look OK now for the government in terms of financing its deficit, but there’s a real remaining question about how we get out of this mess,” he added.