By Niraj Chokshi
January 8, 2013
In just a few weeks, the federal government won’t be able to pay all its bills on time. If that happens, the nation could start paying its lenders, many of them foreign, before its citizens.
At some point no later than March 1, the government will reach what the Bipartisan Policy Center has ominously named the X-Date, “the day on which Treasury no longer can pay the debts of the United States except with money that is coming in on that day,” according to Steve Bell, the center's senior director of economic policy and a former longtime senior Capitol Hill staffer. Unless Congress intervenes to raise the country's borrowing limit, the U.S. will default on its debt. There might be one way for the government to avoid defaulting, however. Treasury could pick and choose which bills to pay, with a preference toward paying interest on U.S. debt, much of it held by foreign investors.
Between Feb. 15 and March 15, the BPC predicts the nation will collect just $277 billion to pay $452 billion in obligations, including payments related to tax refunds, Medicare and Medicaid, Social Security, debt interest and more. In other words, Treasury will only collect enough to meet about 60 percent of its obligations.
The process of paying off the interest on the debt before other obligations is called “prioritization,” and it was proposed during the last debt-ceiling fight in 2011 and more recently by Pennsylvania Republican Sen. Pat Toomey. The reasoning behind it is simple: The United States' reliable payment on its debts is crucially important, not just to the nation but to the world, which uses U.S. debt as a basic benchmark for all kinds of other financial instruments. If the nation were ever to stop meeting its debt obligations, the ripple effect would be devastating.
“We’re talking about the reserve currency of the world, we’re talking about the deepest and most liquid markets in the world … and we’re talking about the possibility of that country not meeting its financial obligations,” said the BPC's Bell, who in a Monday meeting with reporters described how prioritization could work, though neither he nor the group endorses it.
So how does the government maintain its debt obligations, even if lawmakers fail to raise the debt ceiling? Simple: End, reduce, or delay other payments, such as those to Social Security, Medicare or Medicaid beneficiaries or to government contractors.
“Projects would be postponed, some vendor payments would be delayed, certain programs would be suspended, and many government employees might be furloughed,” Toomey wrote in a Wall Street Journal op-ed two years ago, describing the effects of prioritization. “Default would easily be avoided, but these cuts would certainly be disruptive.” Toomey sponsored a bill (which went nowhere) that would have provided Treasury with the authority to prioritize its bills just in case a potential default scenario was reached.
But whether Treasury currently has authority to decide the order it pays its bills is up for debate. The administration and Treasury Department have argued that it doesn’t. “Legislation to ‘prioritize’ payments would simply represent default by another name,” according to Treasury. And one official at Standard & Poor’s, which downgraded the government after its last debt-ceiling fight, told The Wall Street Journal that the debt could be downgraded—with potentially damaging consequences for confidence and the economy — even if prioritization were employed.
On March 1 alone, the BPC's outside estimate of when the nation will truly hit its debt ceiling, the government is expected to collect only one-fourth of the amount it needs to pay out — enough to cover Medicare and Medicaid payments, but nothing else.
Treasury is currently using so-called "extraordinary measures" to postpone hitting the debt limit, but has yet to release an official estimate of when the borrowing limit will be reached.
By Niraj Chokshi
January 8, 2013