WASHINGTON—The Obama administration believes congressional leaders must agree to a deficit-reduction deal by July 22 in order to raise the government's borrowing limit in time to avoid a default in early August, according to Democratic officials with knowledge of the negotiations. 
 
 The government needs a week or two to write and pass the necessary legislation and take the steps necessary to avoid missing a payment. "We're down to the wire," one official said. 
 
 President Barack Obama and Senate leaders have agreed on the outline of an agreement to cut federal spending by about $1 trillion over at least 10 years, but are deadlocked over whether to include some tax increases, as Democrats insist, or take them off the table, as Republicans want. The Senate agreed Thursday to cancel its planned recess next week to stay in town in pursuit of an agreement. Still, many disagree about what would happen if they don't reach a deal, and it is hard to know for certain because the federal government hasn't defaulted in modern times. 
 
 Some, including top officials at the Treasury Department and the Federal Reserve, say the consequences of failing to raise the $14.29 trillion debt limit by Aug. 2 would be catastrophic, with the U.S. government unable to meet all its financial obligations, interest rates soaring, thousands of businesses filing for bankruptcy and hundreds of thousands of people losing their jobs almost overnight. 
 
 "If we didn't pay our bills, it would plunge the United States not into a recession, not into the so-called double-dip recession, but into a full-blown depression," Senate Majority Leader Harry Reid (D., Nev.) said Thursday. 
 
 The International Monetary Fund said this week that failing to raise the ceiling would send "a severe shock to the economy and world financial markets." 
 
 But skeptics have said the impact is much less certain and would depend in large part on whether the White House could avoid defaulting on its debt by continuing to make interest payments to bondholders, such as China. The Obama "administration insists on pretending that...as soon as the first employee is furloughed there will be a catastrophic collapse of the markets because the world will see the U.S. government in default," said Sen. Pat Toomey (R., Pa.). "That's ridiculous." 
 
 White House officials emphasized this week that they wouldn't choose which payments to make and which to suspend if the debt ceiling isn't raised, with Treasury Secretary Timothy Geithner calling the idea "unwise, unworkable, unacceptably risky, and unfair to the American people." 
 
 The federal government hit the debt ceiling in May but has been able to keep operating through a series of emergency funding maneuvers. But Treasury officials say if the government cannot borrow more by Aug. 2, they won't have enough cash to pay all the government's bills. Many members of Congress say they won't vote to lift the debt cap without first reaching an agreement to reduce the federal deficit over the next decade. 
 
 Without a debt-ceiling increase, the Treasury would face several immediate challenges, with $23 billion in Social Security benefits checks due Aug. 3, $90 billion in government debt maturing Aug. 4, and more than $30 billion in interest payments due Aug. 15. 
 
 A key test would be whether Treasury would be able to replace $467 billion in existing debt that matures in August. Investors might shun the new debt as too risky or demand sky-high interest rates. "If they didn't increase the debt ceiling, then truly horrific things would happen both in financial markets and the economy over all," said David Kelly, chief market strategist at J.P. Morgan Funds. 
 
 The consequences would play out in two ways. First, experts believe some sort of "trigger" event would move stock and bond markets, either before or after Aug. 2. Such an event could occur if a rating agency downgraded U.S. government debt, as several have threatened to do in recent weeks. Because Treasury yields are a benchmark for other interest rates, borrowing costs could soar on mortgages, credit cards, business loans and other forms of credit, and send the stock market plummeting. 
 
 Moody's Investors Service said Wednesday if the federal government defaults on its debt, the firm would downgrade its ratings on the other debt linked to Treasurys, such as bonds issued by cities, towns, and large banks, immediately driving up their costs of borrowing. 
 
 The second event would begin Aug. 3, with an immediate and unprecedented drop in federal spending, as the government stopped making payments to Social Security beneficiaries, government workers, Pentagon contractors, and others. 
 
 One reason the consequences remain unclear is because the government would continue to collect taxes in August, giving the Treasury Department enough money to meet more than half its commitments. In August 2010, Treasury brought in $164 billion in revenue for the month, which covered roughly 65% of its spending. 
 
 But reducing federal spending by 44% could mean laying off one-third of the federal work force, said Jay Powell, a visiting scholar at the Bipartisan Policy Center and former top Treasury official during the George H.W. Bush administration. "That's 600,000 or 700,000 workers." 
 
 —Naftali Bendavid contributed to this article. 
 
 Write to Damian Paletta at damian.paletta@wsj.com ||||| With Republicans and Democrats at loggerheads about how to raise the $14.3 trillion debt ceiling, House Speaker John Boehner and Treasury Secretary Timothy Geithner have both indicated that debt limit legislation must be introduced in the House today in order for it to win approval from both houses of Congress and President Obama by August 2, when the Treasury Department says the U.S. will default on its spending obligations. So, will Monday bring big news on the legislative front--some meaningful breakthrough in the political gridlock? If lawmakers' history of missing debt limit deadlines over the past several months is any indication, we shouldn't hold our breath. Let's review: 
 
 May 16 - In three letters to Senate Majority Leader Harry Reid and Speaker John Boehner on January 6, April 4, and May 2, Treasury Secretary Timothy Geithner urges Congress to raise the debt ceiling by May 16 or risk a U.S. default. When Congress misses the deadline, the Treasury Department takes "extraordinary measures" to "temporarily postpone the date that the United States would otherwise default on its obligations" to August 2, when "the borrowing authority of the United States will be exhausted." 
 
 June 31 - On June 1, Speaker Boehner tells reporters a deal "needs to be done over the next month" if "we're serious about no brinksmanship and no rattling investors ... There's no reason to bump up against" August 2." Reflecting on Boehner's optimistic comments, The Hill wonders whether the debt-ceiling talks "could be much different from" the down-to-the-minute government-shutdown negotiations in April. 
 
 July 4 - In mid-June, Vice President Joe Biden predicts that the bipartisan deficit reduction group he's leading will hammer out a plan before the July 4th congressional recess, since the team was tackling "the really hard stuff" and "making real progress." Politico explains that "much of July is still needed for Congress to write complicated changes in federal programs and raise the federal debt ceiling" before August 2 (now consider that we have only eight days until August 2). The fourth of July comes and goes without a deal. 
 
 July 16 - On Thursday, July 14, President Obama gives a bipartisan group of congressional leaders "24 to 36 hours" to come up with a debt limit agreement that could pass both chambers or else be called back to the White House for more talks over the weekend. The weekend ends with Speaker Boehner and House Majority Leader Eric Cantor meeting secretly with Obama but making no progress on a deal. 
 
 July 22 - Back in early July, the Obama administration floated July 22 as the date by which congressional leaders must strike a deficit-reduction deal if the government hoped to write and pass legislation by August 2. Instead, July 22 witnesses Boehner dramatically walking away from negotiations over disagreements with Obama on revenue increases. 
 
 July 24 - In a conference call with Republican lawmakers on Saturday, Boehner says he wants to see substantial progress on a plan to raise the debt ceiling by 2 p.m. on Sunday, before the Asian markets open, according to National Journal. That progress doesn't materialize. The Asian markets respond to the debt standoff better than expected, however, perhaps because analysts still believe lawmakers will reach a deal by August 2. That is, of course, if they start hitting their deadlines. 
 
 Want to add to this story? Let us know in comments or send an email to the author at ufriedman at theatlantic dot com. You can share ideas for stories on the Open Wire. 
 
 Uri Friedman
– The date for what may or may not be financial doomsday is now July 22. Both the Wall Street Journal and the New York Times say the White House has figured that to be the do-or-die day to hammer out a deal with Republicans to avoid an unprecedented default on the national debt. The government has enough funds to keep operating under the debt ceiling until August 2, but it will take time to get legislation through the House and Senate before then to raise the borrowing limit. Hence the July 22 deadline. Democrats say the stakes are enormous: "If we didn't pay our bills, it would plunge the United States not into a recession, not into the so-called double-dip recession, but into a full-blown depression," maintains Harry Reid, who canceled the Senate's July 4 recess. Republicans say those claims are exaggerated: Fears of a "catastrophic collapse of the markets" are "ridiculous," says Sen. Pat Toomey.