CQ NEWS
Jan. 14, 2013 – 5:55 p.m.
Treasury Sees Late Payment on Debts as 'Least Harmful' Alternative
By David Harrison, CQ Roll Call
The Treasury Department likely would resort to paying bills late if Congress refuses to raise the nation’s debt ceiling, a response the department terms its “least harmful” alternative but one that still would reverberate across the economy and hit those who depend on government assistance.
Treasury officials identified the alternative during internal deliberations during the last debt ceiling showdown in 2011. Under that policy, the government would only pay the bills that come due each day once it has enough cash on hand to pay them.
President
“If congressional Republicans refuse to pay America’s bills on time, Social Security checks and veterans benefits will be delayed,” he said.
According to an August report from the Treasury’s Inspector General, agency officials settled on that solution in 2011 only after rejecting other alternatives, such as selling assets, cutting payments across the board or prioritizing payments.
“Treasury officials told us that organizationally they viewed the option of delaying payments as the least harmful among the options under review,” the report said.
The government technically reached the debt ceiling at the end of December, meaning it can no longer borrow money to pay its bills. Treasury Secretary
Geithner sent House Speaker
If the borrowing limit expires, Geithner wrote, “Treasury would be left to operate solely with the cash we have on hand on any given day.”
Not only would Social Security and veterans benefits be delayed but federal employees, contractors and military personnel would also not be paid on time. And bondholders might also not receive interest payments on schedule, which could trigger a sharp increase in interest rates and prompt investors to abandon Treasury securities for more stable investments.
“We might not be able to pay our troops or honor our contracts with small business owners,” Obama said. “Food inspectors, air traffic controllers, specialists who track down loose nuclear materials wouldn’t get their paychecks. Investors around the world will ask if the United States of America is in fact a safe bet. Markets could go haywire, interest rates would spike for anybody who borrows money.”
So far, however, investors have not shown much concern over the debt limit. Markets expect the debt limit will eventually be raised, said Sam Bullard, a senior economist at Wells Fargo Securities.
According to a Bipartisan Policy Center report released last week, Treasury has $52 billion in obligations due on Feb. 15, the first day the government could exhaust the measures it has been taking since the start of the year. If officials decided to delay all payments, including the $30 billion in interest returns included in that day’s obligations, they would have to wait until Feb. 22 to pay the bills.
Treasury Sees Late Payment on Debts as 'Least Harmful' Alternative
That would delay payment of the next day’s bills, which would in turn further delay payments of later bills and the costs of some of those obligations could rise as payments are put off. “That puts you on the wrong side of compounding,” said Steve Bell, senior director of economic policy at the center.
But Chris Chocola, president of the conservative Club for Growth, dismissed Treasury’s plan to delay payments as a political act to rile up Social Security recipients and others.
“It would be politically expedient for them to say that,” he said.
The better solution, Chocola said, would be for the Treasury to prioritize payments, using existing revenues to pay interest on debt, Social Security recipients and the military first.
Republicans say any increase in the debt ceiling must be matched by an equivalent cut in spending. Conservatives are also becoming increasingly vocal in suggesting they are willing to trigger a government shutdown to achieve those cuts.
“We are going to look at all the options,” including a shutdown or raising the debt ceiling “in short-term increments,” said Rep.
Some conservatives have sought to downplay the consequences of not raising the debt ceiling, arguing the government could still make vital payments to bondholders, Social Security retirees and military personnel while shutting down other government functions.
“We have to distinguish between default, which is what happens if we don’t pay the interest on our national debt as it accrues, and failing to raise the debt limit,” said Sen.
Roughly 39 percent of government spending is borrowed, which means that revenues can still account for 61 percent of spending obligations.
Treasury officials, however, have long said their existing computer systems make this sort of selective payment impossible.
So far, President
“We are not a deadbeat nation,” he said Monday.
The administration has ruled out such solutions as invoking the 14th Amendment to the Constitution to raise the limit, despite pleas from Democratic leaders on Capitol Hill.
Treasury Sees Late Payment on Debts as 'Least Harmful' Alternative
Still, a senior Senate Democratic aide said Monday party leaders wanted the White House to “take another look” at using the 14th Amendment, which states that the “validity of the public debt of the United States ... shall not be questioned.”
“We would like the White House to assert more leverage than they are now asserting in dealing with the debt squabble,” the aide said.
Alan K. Ota contributed to this report.