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Debt Drama Blocks Out Big Picture on Credit

Treasury Secretary Timothy F. Geithner has held out Aug. 2 as a deadline. President Obama warned of dire consequences.Chris Usher/CBS News, via Associated Press and pool photo by Jim WatsonTreasury Secretary Timothy F. Geithner has held out Aug. 2 as a deadline. President Obama warned of dire consequences.

9:42 p.m. | Updated

As Washington continues to debate a debt deal, the Obama administration has been preparing the country for the worst, with officials essentially saying the sky is about to fall.

But so far, oddly enough, nothing has happened. Despite warnings that a deal would need to be brokered by Sunday night before the Asian markets opened, stocks merely stumbled on Monday — the type of weakness usually associated with soft corporate earnings instead of an economic apocalypse.

Wall Street’s blasé response presents a serious challenge for the administration. The government has been ringing the alarm bells of an impending catastrophe to add urgency to its efforts to get Republicans to hash out a compromise.

President Obama, in his address on Monday night, again warned of dire consequences if a deal is not reached.

“We would risk sparking a deep economic crisis, this one caused almost entirely by Washington,” he said.

While the sky indeed may fall if the sides cannot compromise, the fact that the market has been calm has served only to deepen the resistance to a deal. People who perhaps should be worried don’t seem to be, and worse, appear to have stopped listening to the warnings.

How did it come to this?

The administration may have made a strategic mistake in warning too soon that the market would react negatively. It ultimately undercuts the government’s negotiating position because the doomsday scenario has not played out, even though the deadline is fast approaching.

Neil M. Barofsky, the former special inspector general for the Troubled Asset Relief Program.Mark Wilson/Getty ImagesNeil M. Barofsky, the former special inspector general for the Troubled Asset Relief Program.

“They have lost all credibility,” said Neil M. Barofsky, the former special inspector general for the Troubled Asset Relief Program. “It’s so typical of the way Treasury and the Fed treat everything — it is always to warn that Armageddon is coming.”

The Treasury secretary, Timothy F. Geithner, is among those who may have miscalculated.

He has consistently held out Aug. 2 as the cutoff date for lawmakers to reach a compromise. After that, Mr. Geithner has said the government might not be able to continue sending out Social Security checks or Medicare payments. “On Aug. 2, we’re left running on fumes,” he told the CBS program “Face the Nation.”

He told me back in May that he was expecting to reach a deal by mid-July, way ahead of the final deadline. “Why would you want to experiment? In July, you’d want this done.”

But increasingly, the market seems to believe it was a false deadline. Some economists have said the government would have enough cash on hand to continue making payments for several days at least. The administration could also decide how to prioritize payments. The government, for instance, could opt to pay interest on Treasuries and put off other bills.

In other words, the United States has some wiggle room.

Mohamed El-Erian, the chief of Pimco.Jonathan Alcorn/Bloomberg NewsMohamed El-Erian, the chief of Pimco.

“The Aug. 2 deadline is not as hard as indicated by Secretary Geithner,” said Mohamed El-Erian, the chief executive of Pimco, the large bond manager.

It doesn’t help the government’s case that investors believe the debate over the debt ceiling amounts to political posturing. Wall Street is counting on lawmakers to work out a deal, albeit at the last minute — a big reason the markets remain sanguine.

“The markets believe the political parties will reach a compromise agreement to avert a default,” Mr. El-Erian said, especially considering that they may have a bit more time on the doomsday clock.

Investors have good reason to ignore the drama. In years past, politicians have rubber-stamped an increase in the debt ceiling with little discussion or dissent. Since 1962, Congress has voted to increase the limit 74 times, according to the Congressional Research Service, a division of the Library of Congress. It happened 17 times under President Ronald Reagan and four times during the Clinton administration.

But investors may have been lulled into a false sense of security and, as a result, they may have missed the bigger picture.

Whether lawmakers reach an agreement about the debt ceiling may be beside the point. Republicans and Democrats are likely to comprise at some eventual date.

The question is how rating agencies will view the country’s creditworthiness, even if a deal is reached.

To some extent, that’s why lawmakers are wrangling over whether to pursue a stop-gap measure for the next couple of months versus a long-term plan. Standard & Poor’s threatened that it would cut the United States rating if lawmakers didn’t come up with a “credible” solution.

“What I think is underappreciated until now is a possible outcome whereby the debt ceiling is increased, debt default is avoided, but one of the rating agencies feels compelled to downgrade America’s AAA because of insufficient agreement on medium-term fiscal reform,” Mr. El-Erian said.

If the country were to lose its vaunted rating, the federal government, companies, homeowners and innumerable others would see their costs skyrocket — a situation that would certainly send the markets into a downward spiral.


Blasts and Gun Attack in Norway; 7 Dead

OSLO — Powerful explosions shook central Oslo on Friday afternoon, blowing out the windows of several government buildings, including one housing the office of the Norwegian prime minister. The state television broadcaster, citing the police, said seven people were killed and at least 15 injured; a spokeswoman for the prime minister, Jens Stoltenberg, said he was “safe and not hurt.”

SCANPIX, via Associated Press

Deadly explosions shattered windows on Friday at the government headquarters in Oslo, which includes the prime minister’s office. A spokeswoman for Prime Minister Jens Stoltenberg said he was safe.

The New York Times


Readers’ Comments

“I have friends who are stationed on the youth camp. A friend says she’s hiding in a closet. Some of the teenagers have started swimming from the island. Right now I am so scared. Everything has changed in just a few hours. “

Sara, Oslo

Shortly after the explosions, which appeared to be a bomb attack, a man dressed as a police officer opened fire on a summer camp for young members of the governing Labor Party on the island of Utoya about 25 miles northwest of the city, and wounded at least five, a Norwegian security official said.

“The situation’s gone from bad to worse,” said Runar Kvernen, spokesman for the National Police Directorate under the Ministry of Justice and Police, adding that most of the children at the camp were 15 and 16 years old. There were initial reports that Mr. Stoltenberg was scheduled to attend a meeting at the camp.

As fear spread through the capital, the police moved to lock down a wide area of the city center, where the streets were already nearly deserted.

The attacks appeared to be part of a coordinated assault on the ordinarily peaceful Scandinavian nation, as images of the damaged government buildings called to mind past terror attacks in Beirut or Baghdad or Oklahoma City.

Though the police did not immediately connect the explosions with terrorism, the mangled wreckage of a car could be seen in front of the main government building, flipped on its side, damaged so badly that its make and color were not apparent, and a large area of sidewalk pavement was completely blown away. Reports in local media said that officials were assuming it was a deliberate bombing.

A terror group, Ansar al-Jihad al-Alami, or the Helpers of the Global Jihad, issued a statement claiming responsibility for the attack, according to Will McCants, a terrorism analyst at C.N.A., a research institute that studies terrorism. The message said the attack was a response to Norwegian forces’ presence in Afghanistan and to unspecified insults to the Prophet Muhammad. “We have warned since the Stockholm raid of more operations,” the group said, according to Mr. McCants’ translation, apparently referring to a bombing in Sweden in December 2010. “What you see is only the beginning, and there is more to come.” The claim could not be confirmed.

Norway is a member of the NATO alliance and has a small fighting contingent in Afghanistan. It was one of several countries named by Ayman al-Zawahri, the leader of Al Qaeda, as potential targets for attack. In 2006, Norwegian newspapers reprinted Danish cartoons that angered Muslims by lampooning Muhammad. Norway has also historically been a frequent participant in peacekeeping missions and a host for diplomatic talks, including the 1993 Oslo Accords between Israel and the Palestinians. The Nobel Peace Prize is awarded by a committee of the Norwegian Parliament.

Muslim leaders in Norway swiftly condemned the attacks. “This is our homeland, this is my homeland; I condemn these attacks and the Islamic Council of Norway condemns these attacks, whoever is behind them,” said Mehtab Afsar, secretary general of the Islamic Council of Norway.

Norwegian news media, citing the police, said the shooting suspect at the camp had been arrested.

Witnesses on the island told Norwegian television that the man identified himself as a police officer when he entered the camp. “He said it was a routine check in connection with the terror attack in Oslo,” one witness told VG Nett, the Web site of a national newspaper.

Bjorn Jarle Roberg-Larsen, a Labor Party member who had telephone contact with teenagers on the island, said: “Kids have started to swim in a panic, and Utoya is far from the mainland. Others are hiding. Those I spoke with don’t want to talk more. They’re scared to death.” The island is about one-third of a mile from shore at its closest point, and has no bridge to the mainland.

In Oslo, stunned office workers and civil servants in the vicinity of the bombed buildings said that at least two explosions were heard in quick succession, as the sound of the blasts echoed across the city. Giant clouds of light-colored smoke rose hundreds of feet into the air over the city as a fire burned in one of the damaged structures, a six-story office building that houses the oil ministry

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