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Hard Choices on Debt if the U.S. Hits the Ceiling

The New York Times

Thursday, January 17, 2013

By mid-February or early March, the United States could face an unprecedented default unless it raises its debt ceiling, the Treasury Department said this week.

Some legislators have theorized that a quick breach in the debt ceiling might cause only a minor disruption to government finances. And some commentators have suggested that the United States could pass legislation to prioritize or guarantee payments to bondholders, thus erasing what they describe as the worst of the financial market reaction and removing the threat of technical default.

But experts in government finance and markets described running up against the debt ceiling as an event that might quickly precipitate a financial crisis and eventually lead to a recession — an event with far greater disruptive potential than the “fiscal cliff” package of tax increases and spending cuts, a government shutdown or even the collapse of Lehman Brothers.

View BPC’s Debt Limit Analysis

A debt-ceiling crisis would be at its heart a cash-management problem. Every day the government receives millions of bills to pay, to its employees, older Americans, soldiers, bondholders and contractors, among others. Under normal circumstances, it makes payments with new revenue as well as with the proceeds from bond sales. But the country has already run out of authority to issue new debt, as of Dec. 31, and Congress has not yet raised the statutory debt ceiling, currently around $16.4 trillion.

The Treasury Department is undertaking “extraordinary measures,” like suspending the reinvestment of certain government retirement funds, to leave it with more cash on hand. But such measures buy the country only so much time, and in a matter of weeks outflows will overwhelm inflow.

That day might be Feb. 15, for instance. According to a Bipartisan Policy Center analysis, the government expects about $9 billion in revenue to arrive in its coffers that day. But it has $52 billion in committed spending on that day: $30 billion in interest payments, $6.8 billion in tax refunds, $3.5 billion in federal salaries, $2.7 billion in military pay, $2.3 billion in Medicaid and Medicare payments, $1.5 billion owed to military contractors and a smattering of other commitments…

Businesses and individuals would be left without expected funds from the government, and a tremendous financial crisis might ensue. “We’re the reserve currency of the entire world,” said Steve Bell of the Bipartisan Policy Center. “There’s trillions of dollars of our debt sliced and diced into all sorts of financial instruments around the world. If you’re a 28-year-old bond trader for Nomura in Tokyo, and someone says, ‘Hey, we just heard a rumor Treasury isn’t making all its payments,’ what do you do? You panic and you sell.”

2013-01-17 00:00:00
The New York Times