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(Updated from 12:43 p.m. ET with remarks from a market analyst.)
NEW YORK (
TheStreet) -- Investors should understand why some Republicans are willing to allow the U.S. to default on its debt.
President Barack Obama on Monday took a preemptive approach to criticize Republicans on the looming debt-ceiling clash, as he said they had the choice between acting responsibly and paying Congress' bills, or acting irresponsibly by allowing the economy to crash.
"They [Republicans] will not collect a ransom in exchange for not crashing the American economy," Obama said. The president said legislators' inability to raise the debt ceiling would leave investors in a tough position.
"Investors will ask if the U.S. is a safe bet. ... Markets would go haywire, interest rates would spike for anyone who borrows money," he said.
The comments came after a
Politicoreport emerged Monday morning that House Republicans were "seriously" considering allowing the country to default on its debt.
House Republicans and Obama clashed in the summer of 2011, when tea party conservatives refused to caucus with Speaker John Boehner to raise the debt ceiling. The House, at that time, eventually garnered enough votes to avoid a default, but it triggered Standard & Poor's to downgrade the United States' credit rating from AAA for the first time in history.
Republican lawmakers find themselves in a tough political position as the president's re-election has afforded Obama a powerful bargaining chip -- he repeatedly argues that his 2012 victory signaled Americans' willingness to side with his policies -- and as their Jan. 1 agreement to increase taxes in order to avoid the so-called fiscal cliff could lead many constituents in deeply conservative districts to question their representatives' commitment to fulfill campaign promises.
"People are fed up with the Republicans they elected not doing what they were elected to do," a national Republican operative said in an interview. "They wanted them to cut the debt, they wanted them to get rid of some of these programs, they wanted them to make sure taxes don't go up."
Though the president paints a grim portrait of what could happen if Congress fails to reach a deal, some analysts say Republican calls for spending cuts in exchange for a debt-ceiling agreement have legitimate standing.
"If they raise the debt limit without any meaningful spending [cuts], you're going to get a downgrade," said Frank Fantozzi, chief executive of Planned Financial Services. "I really think the ratings agencies realize that ... the direction we're going in is unsustainable."
The president likely will continue to criticize a GOP that appears willing to default, but investors should be familiar as to why these politicians are ready to do this.
"We're going to have a lot of pressure here in Virginia, and I think our entire Republican membership in the House delegation voted against the [fiscal cliff] legislation earlier this week, which is a reflection that they're concerned about being challenged for the nomination," Patrick McSweeney, former Virginia Republican Party chairman,
said in a previous interview. "Every one of them faces a threat."
It's politics. The inability to raise the debt ceiling could be catastrophic for equity markets, but it could also be the re-election formula for many Republicans who could face tough primaries in the 2014 mid-term elections if Congress raises the limit.
Therein lies the question -- is it for the good of the country, or for the good of Washington politicians?
-- Written by Joe Deaux in New York.