White House: Debt prioritization would trigger legal battles

WASHINGTON Fri Oct 11, 2013 2:26pm EDT

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WASHINGTON (Reuters) - The Obama administration warned on Friday that if Congress doesn't raise a cap on government borrowing, efforts to forestall a debt default could trigger huge legal battles that would still damage America's creditworthiness.

Many analysts presume the administration would at least try to prioritize payments to creditors if government coffers run so low later this month that the Treasury is unable to cover all its obligations. Missing non-debt obligations could cause a recession, while missing debt payments is seen as a possible path into an even more damaging financial crisis.

The White House has said it opposes prioritization, while Treasury Secretary Jack Lew said on Thursday the government's payment systems would strain so much in the effort that it would provoke "chaos."

Gene Sperling, a senior advisor to the president, said prioritization would carry other risks as well.

"Even if it was technically possible, which is still very unclear, (it) would be economically horrible for tens of millions of people," he told a finance conference. "There would be extraordinary litigation, massive litigation challenging our system, challenging each payment."

"All of this would put a serious cloud over what has always been the impeccable credit of the United States government," he said.

The Treasury expects to the government will hit its $16.7 trillion cap on borrowing by October 17 and would then have about $30 billion in cash as well as incoming revenue to cover its bills. Because Washington takes in only about 70 cents for every dollar it spends, the government could begin defaulting on its obligations soon after hitting the debt ceiling. Among Washington's many obligations, the government is scheduled to make debt payments on the 17th, 24th and 31st of this month.

Sperling also tried to cast doubt on the notion that Obama could invoke the 14th Amendment of the U.S. Constitution, which some scholars read as prohibiting any sort of default. Under this scenario, Obama would simply order Treasury to continue borrowing even if Congress didn't raise the debt ceiling. The White House has so far rejected this possibility.

"Let's be clear. Section 4 of the 14th Amendment does not give the president of the United States the unilateral authority to borrow," Sperling said.

He said even if Obama tried this strategy, it would invite legal challenges that could roil financial markets.

"That … could create the kind of uncertainty and doubt in Treasury bills and our auctions that would in many ways replicate the harm that would take place from a technical default."

(Reporting by Jason Lange; Editing by Chizu Nomiyama)

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