What is 2011 U.S. Debt Ceiling Crisis
The 2011 U.S. Debt Ceiling Crisis was a contentious July 2011 debate regarding the maximum amount of borrowing that the United States government should be allowed to undertake.
BREAKING DOWN 2011 U.S. Debt Ceiling Crisis
A debt ceiling at the heart of the 2011 U.S. Debt Ceiling Crisis had been in place since 1917, but not at the same level. The government raises the debt ceiling whenever it comes close to hitting it. Hitting the debt ceiling would mean defaulting on interest payments to creditors. The consequences of such a default could include late, partial or missed payments to federal pensioners, Social Security and Medicare recipients, government employees and government contractors, as well as an increase in interest rate at which the U.S. could undertake further borrowing. The 2011 U.S. debt ceiling crisis was a heated negotiation over how to avoid potential problems like these.
Congress resolved the debt ceiling crisis when it passed the Budget Control Act of 2011 and decided to immediately raise the debt ceiling by $400 billion, from $14.3 trillion to $14.7 trillion, with the option for additional increases in the coming months. The agreement included $900 billion in spending cuts over the next 10 years and established a special committee to identify additional spending cuts. In the aftermath of the crisis, Standard and Poor's downgraded the United States' credit rating from AAA to AA+ even though the U.S. did not default.
In the debate, the Republican Party demanded that the President negotiate over deficit reduction in exchange for an increase in the debt ceiling. The debt ceiling had routinely been raised in the past without partisan debate and without any additional terms or conditions. The debt ceiling does not, in fact, prescribe the amount of spending, but only ensures that the government can pay for the spending to which it has already committed itself. Some use the analogy of an individual "paying their bills."
Resolving the 2011 U.S. Debt Ceiling Crisis
If the United States government breached its debt ceiling, the Treasury might have had to either default on payments to bondholders or immediately curtail payment of funds owed to various companies and individuals that had been mandated but not fully funded by Congress. Both situations would likely have led to a significant international financial crisis.
On July 31, two days before the Treasury projected the borrowing authority of the United States would be exhausted, Republicans agreed to raise the debt ceiling in exchange for future spending cuts. The crisis did not permanently resolve the potential of future use of the debt ceiling in budgetary disputes, as shown by the subsequent debt-ceiling crisis of 2013.