The debt limit fight will revolve around issues left unresolved in the cliff deal. | JAY WESTCOTT/POLITICO Enjoy cliff crisis? Wait for debt talks

The fiscal cliff has consumed Washington for months, but it may end up being the long opening act for a fiscal drama with even higher stakes: the debt ceiling.

Even as senators breathed a sigh of relief and overwhelmingly passed a historic tax deal to avert the much-feared fiscal cliff early Jan. 1, Congress was already lurching right into the new round of brinksmanship.


Congress will have to raise the Treasury Department’s $16.4 trillion borrowing limit by late winter, and Republicans see the debate as their best opportunity to extract spending cuts out of the White House.

That’s why they effectively conceded the tax rate battle to President Barack Obama and agreed to a fiscal cliff deal that, if cleared by the House, will raise taxes on individuals making more than $400,000, and couple making more than $450,000.

“I hope Republicans will fight as hard on the debt ceiling as Barack Obama did on tax rates,” Sen. Lindsey Graham (R-S.C.) said Monday on Fox News.

So while popular attention has been fixed on the fiscal cliff’s tax hikes and spending cuts — which economists said could lead to a recession — it’s the debt ceiling debate that is keeping investors awake at night, and that could tarnish the United States’ sterling reputation among creditors.

“Of all the so-called cliffs, only the debt ceiling is a real cliff because once you go off it you will plunge to your death,” said Jaret Seiberg, a policy analyst at Guggenheim Securities. “All of the other cliffs can be fixed retroactively, but once you default on the debt there is no taking that back.”

Obama has warned that he won’t allow 2013 to be a repeat of 2011, which brought the government within hours of a first-ever default, amid Republican demands that a debt ceiling hike be matched by equally large spending cuts. His stance has cheered liberals who felt the president got rolled two years ago.

And without mentioning the debt ceiling itself, Obama came out swinging Monday. In pointed remarks at the White House that angered many Republicans, the president warned that in the next round of deficit reduction talks, he will insist on a “balanced” approach that includes tax hikes, through a reform of the Tax Code, as well as entitlement changes.

“If Republicans think I will finish the job of deficit reduction through spending cuts alone,” Obama said, “then they’ve got another thing coming. That’s not how it’s going to work.”

The early debt ceiling maneuvering also underscores a bitter reality of the down-to-the-wire fiscal cliff fight: even after a 2012 election that was supposed to ease Washington’s divide on taxes and spending, the Capitol remains barely capable of making long-term policy.

Instead, Congress seems wedded to a deadline-to-deadline approach to policymaking.

For advocates of a grand bargain, the fiscal cliff deal itself is being derided as another kick of the proverbial can, though Obama tried to cast it in broader terms. “It may be we can do it in stages,” Obama said Monday. “We’re going to solve this problem instead in several steps.”

The debt ceiling fight will revolve around a host of bargaining chips left unresolved, and sitting on the table, in the fiscal cliff deal: the indiscriminate spending ax of the sequester, which Congress set up as part of the 2011 debt ceiling deal and delayed for two months in yesterday’s compromise, and which members of both parties want to replace; Republican demands for major changes to Medicare and Medicaid, and the inflation calculation used for Social Security benefits; and a tax reform process that members of both parties want to carry out next year.

And there’s another deadline coming in March as well — the expiration of the continuing resolution that’s been keeping the government operating since September.

“The debt limit and the continuing resolution are an opportunity to raise [a spending cut debate]. The public will look at those as spending cliffs, if you will,” Sen. Rob Portman (R-Ohio) said last week. “If we make it through this cliff we're going to get another one right away.”

The 2011 debt-ceiling standoff cost the United States its perfect credit standing with rating agency Standard & Poor’s, and Fitch Ratings warned earlier this month that it would consider a downgrade of its own if lawmakers again flirt with default.

That, in part, is why Treasury Secretary Timothy Geithner, after the November election, proposed altering the law to effectively take away lawmakers’ control over the debt ceiling.

The idea was modeled in part after the 2011 mechanism devised by Senate Minority Leader Mitch McConnell (R-Ky.), in which lawmakers were given only the ability to disapprove of three separate debt ceiling hikes. None of those efforts succeeded, and the $2.1 trillion debt ceiling increase occurred as scheduled.

Geithner’s more sweeping proposal, made as part of Obama’s initial fiscal cliff offer to House Speaker John Boehner, was widely panned by Republicans who are in no mood to give up their leverage with administration.

Treasury hit the debt ceiling Monday and Geithner began employing “extraordinary measures” — like postponing payments to government pension funds and suspending a securities program popular with cities and municipalities — to ward off default for about two months.

Democrats have complained that Republicans’ decision to draw a harder line over the debt limit last year went beyond the usual Washington power play and irresponsibly called into question the once unquestionable: whether the U.S. would pay its debts.

Even if Congress steers clear of default, another round of debt-ceiling brinkmanship could do further damage to the U.S. credit rating, analysts said.

“It's hard to predict when the global investing community might lose confidence in the United States but courting that possibility doesn't make sense,” said Rob Nichols, president of the Financial Services Forum, a group that represents the CEOs of large banks and other financial services companies.

Deficit hawks have long claimed that the nation’s deep debt, accompanied with negative reviews from credit agencies, could cause investors to demand higher interest rates from federal borrowers and driving the country further into the red.

Thus far, those fears have not panned out — U.S. borrowing costs have plunged since the S&P downgrade — but market watchers worry that another blow to the credit rating could tip the balance.

“If a second rating agency downgraded the U.S., there would be a real and dramatic effect,” said Brian Kessler, an economist at Moody’s Analytics. “Even if they kick the can down the road again and come up with a three-month raise for the ceiling, it’s still pushing the debate forward, and it shows the credit rating firms that there is an unwillingness to address this issue.”

Kelsey Snell and Jon Prior contributed to this report.

This article first appeared on POLITICO Pro at 2:18 a.m. on January 1, 2013.