Forget the fight over funding the government until year's end. The focus in Washington is beginning to shift to the threat of a default on the nation's financial obligations.
Speaking to the House Budget Committee on Thursday, CBO Director Doug Elmendorf laid out the possible consequences that would follow a failure to raise the nation's $16.7 trillion borrowing limit by mid-October.
"Defaulting on any obligation of the U.S. government would be a dangerous gamble. In a very uncertain world, the one thing everyone has been able to count on is that the U.S. government will pay its bills on time," Elmendorf said, according to a report from Reuters.
According to senior aides on Capitol Hill, House Republicans are set to unveil a bill by the end of the week outlining their plan to tackle the debt and raise the U.S. borrowing limit.
The bill would include a one-year increase on the debt ceiling, a one-year delay of the Affordable Care Act, and a mix of policy choices including a fast track to tax reform, eliminating the Dodd-Frank bailout fund, approval of the Keystone pipeline, and many other facets.
Since Treasury reached its borrowing limit in May, the department has been relying on "extraordinary measures" to fund the government and cover financial obligations. But earlier this week, Secretary Jack Lew said those extraordinary measures will be exhausted by October 17th, at which point Congress must decide whether to increase the borrowing limit or default.
In a note to clients on Thursday, HSBC said the debt ceiling fight is the next crisis point and carries much more weight and risk for the financial markets than the showdown over government funding.
"A default by the Treasury on any of its obligations, even for a few days, could potential disrupt the entire financial system by calling into question the value of the Treasury debt used as collateral or as a hedging vehicle in innumerable financial contracts all around the world," the bank wrote in its note to clients.
The Potomac Research Group agrees, calling the Republican efforts to "throw in everything but the kitchen sink" to the debt ceiling bill admirable, but also "laughable". Further, the firm notes the outcome is still unknown, and there's no end game in sight.
"Anyone who tells you they know exactly how this will turn out is lying. The options are mind-boggling. Could Treasury default? Highly unlikely, but the threat will grow. Could Treasury have to prioritize its payments? Officials say they won't, which means they will play the Social Security card -- good luck to the GOP explaining why grandma might not get her monthly check. Could the President raise the debt ceiling by executive authority? If default is imminent, we do not rule out this option," the firm wrote in a note to clients Thursday.
Back to the Budget
While the nation's financial reputation hangs in the balance of Congressional negotiations, the battle over the budget continues in Washington.
The Senate continues to debate the House-passed continuing resolution to avoid a government shutdown. If passed, the Senate's version would restore funding the House took from the president's health-care law, and extend government funding through November 15, a month short of the House's proposed December 15 extension.
In his opening remarks on the floor Thursday, Senate Majority Leader Harry Reid said he would do everything he could to wrap work on the chamber's CR by the end of the day Thursday. In order to do that, he would need unanimous consent. Otherwise, the Senate is expected to end debate Friday, and a final passage of the bill is expected Saturday.
The big question then becomes how many times the House and Senate can pass the hot potato until they reach a deadline to either fund the government or shut it down before 12:00:01 a.m. ET October 1.
"We don't know what the GOP will do with this in the House, but odds are Speaker Boehner is forced to blink hard and pass this thing so he won't have the blood of a shutdown on his hands. What a lovely constructive way for our leaders to operate. Welcome to the banana republic," Michael Block, chief strategist at Rhino Trading Partners, said in a note to investors Thursday.
Following a press conference Thursday morning, House Speaker John Boehner said he would not speculate about a government shutdown until the Senate passes a bill containing a continuing resolution.
If Congress fails to reach an agreement, spending for discretionary budgets including defense, transportation, justice, education, and others would be suspended.
Still, HSBC warns there are consequences to this action as well.
"A short-term shutdown lasting a few days would cause inconveniences for many people, but would not be too disruptive for the economy. A shutdown that lasted more than a week could have deleterious effects that would damage business and consumer confidence in an economy that is still suffering the aftereffects of deep recession in 2008/2009," the bank wrote.
FOX News' Chad Pergram contributed to this report from Washington D.C.