Doyle McManus: The right budget battle to watch

You've no doubt been hearing the harrowing warnings about what might happen if Congress refuses to lift the federal government's debt ceiling, as some conservative Republicans have threatened.

If the federal government gets anywhere near defaulting on its debts, President Obama warned this month, that "could plunge the world economy back into recession."

"A prolonged delay in raising the debt ceiling may negatively impact markets well before a default actually occurs," said Matthew E. Zames of JPMorgan Chase — and chairman of the Treasury Borrowing Advisory Committee — on Monday.

Even House Speaker John A. Boehner (R-Ohio), Obama's chief sparring partner, has agreed that a default "would be a financial disaster."

So how worried should we be? Not very — at least, not in the short run.

Even though the government will technically hit the debt limit in mid-May, the Treasury can use an assortment of accounting tricks to stave off a real squeeze until July or beyond. That's still plenty of time for making a deal.

Despite the dire predictions, it's clear Wall Street isn't all that worried at the moment. We know this from the financial markets, whose traders stand to gain or lose the most in any crisis over federal borrowing. The interest rate on 10-year Treasury bills, the benchmark federal government bond, stood at about 3.3% this week, little changed from its level last year.

"The marketplace is already telling you that this is going to get worked out," said T. Timothy Ryan Jr., president of the Securities Industry and Financial Markets Assn., the financial houses' trade association. "Nobody thinks the U.S. government … is going to cut its own throat."

The bankers and the business establishment have every reason to be confident. All through the presidency of George W. Bush, they watched as conservative firebrands made angry speeches about the need for fiscal restraint, and then Congress voted to raise the debt ceiling.

That's what is likely to happen this time too, but that doesn't mean the country can relax. A battle is underway for the soul of the GOP, pitting Wall Street against the "tea party" movement, whose adherents distrust big banks and big business almost as much as they loathe big government.

Depending on who wins that battle, the next debt ceiling fight could play out very differently.

As many as 50 Republicans in the House might vote against increasing the ceiling this time out, regardless of what spending concessions they can wring out of the Democrats.

Others, like Rep. Michele Bachmann (R-Minn.), are holding out for conditions so tough that they stand just about no chance in the Democratic-run Senate. Bachmann says she'll vote to raise the ceiling only if the measure defunds Obama's healthcare law.

"If we fail to pass increasing the debt ceiling, it isn't that the federal government shuts down," she said this month. "It's just that we'd have to prioritize our spending.... It almost acts like a balanced budget amendment in a way, because it says you can't keep spending money you don't have. That's a good thing!"

The party's two most active potential presidential candidates are divided over the issue too. Former Massachusetts Gov. Mitt Romney says the ceiling should be raised to keep the country running, but that it should be accompanied by spending cuts; former Minnesota Gov. Tim Pawlenty, making an apparent play for tea party votes, says it shouldn't be raised at all.

None of this will, in all likelihood, be enough to prevent a deal, particularly since the most powerful Republican in Congress, Boehner, is pushing hard for a compromise that would include more of the spending cuts his party has been seeking.

"I believe it's responsible to increase the debt limit." Boehner said in an interview with ABC News this week. "But it's time to cut up the credit cards. And that means that we've got to have real cuts in spending."

Obama has already agreed to that general concept, proposing what he calls a "fail-safe" mechanism that would cut spending in future years if debt rose too high; Republicans have rejected that as too gentle and too slow. Sen. Bob Corker (R-Tenn.) and other Republicans have proposed faster, tougher triggers, but have ruled out the tax increases that Democrats want to put on the table. In the middle, the Senate's "Gang of Six" budget negotiators hope to produce a proposal as early as next week to move the debate off dead center.

Those differences make clear that, while it's likely the two sides will agree to a short-term extension of the debt ceiling to avert an immediate crisis, the vote will be followed by months of negotiations between Obama and Boehner over a budget.

How that deal comes out will affect voters' perceptions of the two parties, and their seriousness in addressing a deficit problem that a growing number of Americans want solved. It will produce winners and losers, affecting Obama's chances of winning reelection and the GOP's chances of taking control of both houses of Congress. And it will serve as prelude to the renewed budget negotiations that will take place after the 2012 election is concluded. Those negotiations will almost certainly include yet another showdown over the debt ceiling, this time under a new balance of power.

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