Reuters has found details of the US treasury’s not-so-secret plan should Congress fail to raise the debt ceiling in early August.
In an article published on Thursday, Richard Cowan identifies the three options treasury officials have been exploring as part of their contingency plan.
- Whether the administration can delay payments to try to manage cash flows after August 2
- If the U.S. Constitution allows President Barack Obama to ignore Congress and the government to continue to issue debt
- Whether a 1985 finding by a government watchdog gives the government legal authority to prioritize payments.
There’s been a spirited debate about the meaning of the 14th amendment to the US constitution. Specifcally whether section four on the “validity of the public debt” supersedes section five (and the underlying debt limit legislation).
The conclusion seems to be that it may well trump debt limit legislation, but the imbroglio caused by legal finagling makes it a highly risky strategy to pursue. The last thing the US needs is a Bush-Gore style legal wrangle while the country teeters on the brink of a farcical default. Impeachments — really — are also not out of the question.
Delaying or prioritising payments is also full of problems, as UBS noted in a recent report. Prioritising interest payments doesn’t get over the problem of replacing bondholders that don’t want to rollover their debt, it argues. Then there’s the small political problem of upsetting a key political constituency just over a year before a Presidential election, with $49bn is due to be paid to Social Security recipients on August 3.
However, if there is no deal — which looked a little less likely at pixel time — the US treasury would surely have to decide how to divvy up its remaining cash before it ran completely dry. For what it’s worth, in a note out Thursday Nomura’s US economics team reckons the “real drop dead date” is actually August 9. In a follow-up email to FT Alphaville they wrote:
We looked at cash balances and expected payments (considering both trends in 2011 and typical spending in August 2009 and 2010). While it is certainly an estimate, we are confident Treasury will continue to have funds on August 2, then be able to make the August 3 social security payment. The remaining cash should allow for another 5-7 days before the hard decisions start.
Nomura then make the sensible point that pretty much anything the US treasury does after August 2 (or August 9) is a form of prioritisation. It’ll need to decide, for example, whether to not make payments to entire budget lines or to make pro-rata payments. And then it gets really complicated.
For, as Reuters points out, there are practical issues, which may make a constitutional fight look like the easy option:
If Treasury were to decide to delay payments, it would need to re-program government computers that generate automatic payments as they fall due — a massive and difficult undertaking. Treasury makes about 3 million payments each day.
Back to plan A, Washington.
Nomura note in the usual place.
Related links:
Treasury secretly weighs options to avert default – Reuters
What happens on August 3? – Felix Salmon
Ten trillion and counting – PBS Frontline
The World’s Biggest Hedge Fund Complete Blow By Blow On What Happens If The Debt Ceiling Is Not Raised – Zero Hedge