DEBT CEILING FACE OFF COULD BE UGLY

Tuesday's government shutdown could be just the warm-up act.

The failure by Congress on Monday to renew the federal budget into a new fiscal year is expected to be followed in a few weeks—no one knows exactly when—by an even more dangerous stalemate over raising the government's borrowing authority.

Though disruptive and costly, the current budget freeze is expected to have limited impact on the economy and financial markets, which so far have largely shrugged off Washington's fiscal follies.

While hundreds of thousands of government workers have been sent home, much of the government is operating under spending rules that allow most agencies to keep functioning. That's why the last 17 such shutdowns have caused little long-term damage.

If the government exhausts its legal authority to borrow, however, the Treasury says it will be forced to shut off all cash payments.

The nation's borrowing limit currently stands at about $16.7 trillion. Unlike virtually every other country in the developed worked—that cap has to be extended periodically by a special act of Congress. Though often contentious, the once-routine debt ceiling extension has recently become a political weapon of mass destruction.

Congress came close to forcing a Treasury default in July 2011, pulling back from the brink at the last minute and agreeing to a compromise. The spectacle cost the U.S. its Triple-A credit rating, but no payments were missed. Now, with Congress still dug in over a bitter fight to delay the White House's health care reform law, there's little time left to avert a freeze on government borrowing.

Unlike the hard deadline of the new fiscal year that began Tuesday, the debt ceiling deadline is more complex and dangerous because it's not clear just when it will be reached. The Treasury has been deferring some payments and tapping reserves, but last week estimated that it will exhaust those "extraordinary measures" in less than three weeks.

Treasury figures it will have just $30 billion left on hand by Oct 17—most likely not enough to cover all government spending that day. On a typical day, the government's bills reach $60 billion.

The department faces an even bigger wild card every Thursday, when it rolls over about $100 billion in U.S. debt. If bond holders decided they wanted to be repaid rather to rolling over that paper, the Treasury would be on the hook for those redemptions.

No matter when the cash runs out, the effects of freezing payments would be much more dramatic than the government shutdown. Without Social Security checks, retirees would be forced to cut spending; many don't have a deep pool of savings to draw on. Unpaid government contractors would be forced to lay off workers.

Federal spending would fall by roughly 20 percent almost overnight. That's about about 4 percent of gross domestic product in an economy struggling to expand by 2 percent a year. A protracted borrowing freeze would quickly tip the economy back into recession.