Finance

Five ways federal government can try to avoid default  

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President Biden and Congress have roughly four months to avoid a self-inflicted economic catastrophe. After reaching the debt limit last week, the federal government can no longer issue any new bonds to pay for spending already approved by lawmakers and presidents.

A bipartisan agreement is the most likely and safest outcome. But partisan divides over federal spending and tumult within the GOP House majority make this fight over the debt limit one of the riskiest in recent memory.

Here are five ways the federal government can try to keep the U.S. out of default: 

Biden strikes a deal

Despite political bluster and threats of brinkmanship, most Washington policy analysts expect the latest showdown over the debt ceiling to end in typical fashion: a bipartisan deal to lift the debt limit attached to a budget or spending agreement.

The 2011 debt ceiling crisis ended with former President Obama and a new GOP House majority agreeing to strict automatic budget cuts in 2013. Another standoff in 2013 led to the creation of a special committee meant to strike a long-term funding agreement.

Republicans are once again holding out for spending cuts before agreeing to back a debt ceiling increase, including to Social Security and Medicare. The White House has refused to negotiate, but may feel pressure to yield as a potential default gets closer.

“Washington is probably several months away from when the situation will reach a boiling point and Congress has to get serious,” wrote Brian Gardner, chief Washington policy strategist at investment bank Stifel, in an analysis last week.

Discharge petition

House GOP leaders are opposed to raising the debt ceiling without spending cuts. But House lawmakers could theoretically force the chamber to vote on a clean debt ceiling increase through a “discharge petition.”

If House leaders are blocking a bill filed to a committee from reaching the floor, a simple majority of House members may force a vote on the measure by signing a discharge petition. That would allow all House Democrats and a handful of GOP moderates to force a clean debt ceiling hike up to the Senate.

Even so, Gardner said there are procedural hurdles and political pressures that make it difficult to avert a default through a discharge petition.

Only bills that have been pending before committees for at least 30 legislative days can be discharged through a petition, he explained, and House leadership could still delay a vote.

“Discharge petitions are not useful tools in time sensitive situations,” Gardner wrote.

Payment prioritization

Republican lawmakers have suggested the Treasury Department could limit the harm of defaulting on the national debt by staying on top of certain payments as they come due. Such a process, referred to as payment prioritization, would force the Treasury to choose U.S. bondholders over other expenses.

Legal and financial experts, however, believe this is logistically impossible for the Treasury and would still cause serious financial damage if attempted.

“It seems unimaginable that bond investors, including many foreign investors, would get their money ahead of American seniors, the military, or even the federal government’s electric bill for long,” wrote Mark Zandi, chief economist at Moody’s Analytics, in a Monday research note.

Invoking the 14th Amendment

Some historians and legal experts say Biden can try to invoke a provision of the 14th Amendment to the Constitution, which dictates that debt owed by the federal government “shall not be questioned,” and force the Treasury Department to override the debt limit.

While Biden could attempt to forge a new legal pathway to avoiding a default, Zandi said it would still come at immense financial cost.

“Investors would rightly wonder if using the amendment to abrogate the debt limit law would stand up in the courts, and even if it did, what that would mean for our political system’s checks and balances,” he wrote.

Minting a $1 trillion coin

Both Biden and Obama faced pressure to order the minting of a $1 trillion coin under a 1990s law that gave the Treasury secretary total authority over the issuance, design and assigned value of platinum-based coins. The platinum coin would then be deposited at the Federal Reserve and credited to the Treasury, thus avoiding a default.

“The president and the Treasury secretary have a big red button that they could press at any time that could completely end this whole charade,” said Rohan Grey, assistant law professor at Willamette University and a platinum-coin advocate, in a Tuesday interview.

Even so, Treasury Secretary Janet Yellen on Sunday called the coin a “gimmick” that the Fed may not accept, making clear she is unlikely to issue one.

Tags Biden Janet Yellen Mark Zandi Obama
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