By Peter Schroeder - 10/08/13 10:00 AM EDT
Washington and Wall Street increasingly see Oct. 31 as the drop-dead date for raising the $16.7 trillion debt ceiling. [WATCH VIDEO]
Treasury Secretary Jack Lew says the government would be left with just $30 billion in cash reserves to pay all its bills on Oct. 17, exhausting his agency’s ability to use “extraordinary measures” to keep the government’s bills paid.
“I have a very specific estimate, and it changes every day,” said Alec Phillips, an analyst at Goldman Sachs. “People think it’s more certain than it is.”
What is clear is that the Treasury has $67 billion in payments to Social Security and Medicare beneficiaries, as well as pay for active-duty members of the military and benefits for civil service and military retirees due Nov. 1, according to the Congressional Budget Office.
One day before that, the government is supposed to make a $6 billion interest payment on its bonds.
The Treasury clearly wouldn’t be able to make all of those payments on Nov. 1 unless Congress raises the debt ceiling.
“The one thing we know for sure is that by Nov. 1, they will be out of money,” said Phillips.
That would leave the Treasury in uncharted territory.
The U.S. government has never failed to raise its borrowing limit, and other than a brief computer glitch in 1979, there’s never been a U.S. default on its debt.
But the ongoing chatter about the “real” deadline for Congress to act is driving concern that Oct. 17 might not be treated as do-or-die time by lawmakers looking to extract a bit more leverage by pushing to the absolute brink.
“If everybody is discussing when the actual deadline is, it’s not necessarily a good sign for them reaching an agreement by the 17th,” said Phillips.
“It’s really just a guessing game,” said Shai Akabas, senior policy analyst at the Bipartisan Policy Center. “It’s how much of a risk you want to be taking with the U.S. economy or the world economy.”
Most observers expect the Treasury would try to pay U.S. bondholders in the event that it reached the end of the month with no increase in the debt ceiling.
The 14th Amendment states that the “validity of the public debt of the United States ... shall not be questioned.”
“It’s likely under any scenario, they would do everything possible to make sure the interest on the debt is paid,” Akabas said.
Despite the amendment, however, the Treasury Department argues it has no legal authority to decide which government payments to prioritize, and prioritization plans are unworkable under its existing systems.
The House has approved legislation that says the government should first pay bondholders, but that legislation has not been approved by the Senate, and the White House has threatened to veto it.
Not paying bondholders would upend markets by throwing into question what was thought to be the safest security on the planet — Treasury bonds.
The U.S. would face an immediate and severe downgrade, borrowing rates would spike across a host of financial products, and stock markets and consumer confidence could collapse, taking the economy down with it.
Even if bondholders are paid, stocks could crash, and the U.S. could see its credit rating downgraded if the debt ceiling is not raised, and a host of other government payments cannot be made.
“Prioritization is default by another name,” White House press secretary Jay Carney argued Monday. “If you pay some of your bills and not all of your bills, you’re in default on the bills that you didn’t pay.”
“You’ve got to pay all your bills; that’s how you maintain your credit worthiness,” he added.
Financial services industry executives also argue the effects of not raising the debt ceiling would be calamitous, even if there is not a technical default.
“How long do you continue to invest in the United States when you have deteriorating confidence; you see they’re missing bills,” said one financial services industry executive. “If we stop paying some of the things that we said we’ll pay, even if we’re still paying the interest on our debt, I still think people will look at us with a quizzical eye and say, ‘That’s a banana republic.’ ”
Erik Wasson contributed.