Financing a US War on Iraq Stirs Anxiety

NEW YORK (Reuters) - A U.S. attack on Iraq could reshape the increasingly grim federal budget landscape, making deficit projections, already bleeding red, look far worse in coming months.

Administration officials have argued a $300 billion swing from surpluses to deep deficits in just one year will be rectified by 2005. But analysts are skeptical. They say that deficits will worsen before there is any improvement.

Building expectations for massive deficits could also speed up an eventual increase in market interest rates, threatening the recovery. Interest and mortgage rates, now at their lowest levels in a generation, are helping companies get back on their feet and are fueling a housing boom.

"There is considerable risk of a large further expansion to Treasury borrowing in the event of U.S.-led military action against Iraq," said John Youngdahl, senior economist and Treasury financing watcher at Goldman Sachs.

Those comments came just a few days after White House senior economic advisor Lawrence Lindsey pegged the cost of a war with Iraq anywhere from $100 billion to $200 billion, far exceeding a previous military estimate of $50 billion.

"These are pretty serious numbers," said Anthony Karydakis, financial economist at Banc One Capital Markets in Chicago. "I would be highly skeptical of anyone who tells me that the deficits will last for only another year or two and then we go back to surpluses."

Even Federal Reserve ( news - web sites) Chairman Alan Greenspan ( news - web sites), who supports the Bush administration's $1.35 trillion tax cut that took a huge bite out of projected budget surpluses, said fiscal discipline is under siege.