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Ugly choices await Treasury if debt deal isn't reached

WASHINGTON — Although experts still expect an 11th-hour compromise in Congress to raise the debt ceiling, the Treasury Department and the Federal Reserve are busily prioritizing who'll get paid and when, should the government run out of authority Tuesday to borrow more money.

At the top of the list are likely to be bondholders. Officials want to keep them whole to ensure that the U.S. government doesn't default on its debt obligations for the first time in history. That could rattle world markets and kick the weak U.S. economy back into recession.

But Treasury's incoming revenue covers only about 60 cents on every dollar the U.S. owes in bills, so someone's not going to get paid if Congress doesn't raise the debt ceiling permitting more borrowing. Who?

Treasury officials would have to decide whether to pay retirees on Social Security before or after active-duty soldiers, whether to forgo pay to federal workers or to withhold payment for services rendered by federal contractors. The list is long: In any given month, the Treasury Department issues about 80 million checks, according to the White House.

President Barack Obama, Treasury Secretary Timothy Geithner and a handful of other administration officials privately have been crafting a worst-case scenario plan to prioritize who gets paid and who gets stiffed. They've sought to reassure markets that there will be a plan, but they're not discussing details yet. Rumors are circulating that it will be released after markets close on Friday.

"It is a matter of due diligence and responsible governance that Treasury will — if we approach that date, as we get closer to that date — explain how it would manage a situation that would be created by the failure of Congress to act," White House spokesman Jay Carney said Thursday. Significantly, Carney declined to say whether the administration would prioritize who gets paid.

A Treasury official, speaking on condition of anonymity given the sensitivity of the issue, added that the agency "will provide more information as we get closer to Aug. 2 regarding how the government would operate without new borrowing authority if the debt limit is not increased."

The Federal Reserve is working closely with the Treasury Department to dampen the panic and confusion that'll surely follow if lawmakers fail to compromise.

"In these matters, the Federal Reserve serves as the fiscal agent of the United States government. As such, we have been engaged in operational planning with the Treasury," said Barbara Hagenbaugh, a Fed spokeswoman. "We expect to be able to give additional guidance to financial institutions when there is greater clarity from the Congress and as Treasury details its specific plans."

The Small Business Administration plans for only "business as usual on Aug. 3," said spokesman Michael Stamler. Other agencies won't even talk about their plans. The Department of Veterans Affairs declined to comment and the Social Security Administration did not return calls for comment.

The United States has been in this position before, according to Alex Pollock, a senior researcher at the American Enterprise Institute, a conservative research center. In a Wednesday blog, he noted that Congress failed to extend the debt ceiling in 1953. President Dwight D. Eisenhower responded by increasing gold certificate deposits with the Fed, which then credited Treasury's account at the central bank and thus increased the cash balance to pay bills. Treasury spent the profits it had made from the sale without having to issue new debt until the ceiling was raised in 1954.

"Should we follow Eisenhower's example?" Pollock asked jokingly, noting that Treasury still owns more than 8,000 tons of gold, now at record prices.

That's not likely. Treasury hasn't faced this sort of dilemma since the late 1970s, before modern computing and vast electronic payment systems. So many payments are automated and electronic that it's hard to imagine that something won't fall through the cracks should Treasury be forced to pick winners and losers.

The Bipartisan Policy Center calculates that from Aug. 3 through Aug. 31, Treasury would get revenue inflows of $172 billion, but bills due of $306 billion. That's a shortfall of $134 billion. Treasury would exhaust all the incoming revenue if it chose to avoid cuts to only six programs: Social Security, Medicare, Medicaid, unemployment insurance and defense contractors.

On the first day, according to the center's calculation, the government will take in about $12 billion and owe $32 billion in payments — $23 billion of that Social Security payments. By Aug.15 it gets more complicated, with a $19 billion daily deficit, $29 billion due in interest payments and a scheduled auction to pay off $27 billion in bonds that are maturing, said the center. But if Congress doesn't let Treasury borrow any more, that auction won't happen — and lots of folks won't get paid.


Financial Services Forum letter to the president and Congress

Bipartisan Policy Center scenario


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