Treasury says debt payments could be prioritized in default scenario

LOS ANGELES Fri May 9, 2014 3:10pm EDT

U.S. Treasury Secretary Jack Lew testifies before the Senate Budget Committee about the President's 2015 Budget on Capitol Hill in Washington, in this March 12, 2014 file photo. REUTERS/Kevin Lamarque/files

U.S. Treasury Secretary Jack Lew testifies before the Senate Budget Committee about the President's 2015 Budget on Capitol Hill in Washington, in this March 12, 2014 file photo.

Credit: Reuters/Kevin Lamarque/files

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LOS ANGELES (Reuters) - The Treasury Department has admitted for the first time that the government is technically capable of prioritizing payments if Congress triggers a default crisis by failing to raise the country's borrowing authority.

In a letter to Republican Congressman Jeb Hensarling, a senior aide to Treasury Secretary Jack Lew said the New York Federal Reserve, which pays the principal and interest on government debt, would be "technically capable" of continuing to make those payments while Treasury halted other payments if the United States was unable to borrow more money. The official stressed, however, that such a system is untested.

Lew and other Treasury officials insisted during last October's debt limit crisis, when the U.S. came close to defaulting on some government obligations, that "prioritization" - a contingency strategy where bond payments are made while other outlays such as Social Security payments are halted - was not feasible.

In testimony to Congress, Lew said last October the government's payment systems weren't designed to decide who gets paid and who doesn't. "It would be chaos," Lew told Congress.

During the debt ceiling crisis last year, when House Republicans threatened not to extend the country's borrowing authority, Obama administration officials were at pains to dismiss the idea of any contingencies, lest that encouraged enough lawmakers to take the country over the brink and into default.

Yet lawmakers and analysts have long suspected that in the event of a default, Treasury and Fed officials would seek to keep current on bond payments to keep investors from panicking, while halting other payments as cash reserves ran out.

In the May 7 letter to Hensarling, the Republican Chairman of the House Financial Services Committee, Treasury Assistant Secretary Alistair Fitzpayne wrote: "If the debt limit were not raised, and assuming Treasury had sufficient cash on hand, the New York Fed's systems would be technologically capable of continuing to make principal and interest payments while Treasury was not making other kinds of payments."

But, Fitzpayne added, "this approach would be entirely experimental and create unacceptable risk to both domestic and global financial markets. As we have repeatedly stated, this would mean that the United States would default on its obligations, including to senior citizens, veterans, and members of the military."

Mick Mulvaney, a Republican member of the House Financial Services Committee, said on Friday he believed the letter proves payments can be prioritized if the debt ceiling is not raised, and that a financial meltdown would not occur.

"I've thought from the very beginning that the administration has been stoking fear in what they say would happen if the debt limit is not raised," Mulvaney told Reuters.

Congress extended the government's borrowing authority in October, ending the crisis, and again in February, when it extended it through March 2015.

(Reporting by Tim Reid; Editing by Diane Craft)

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Comments (29)
tommelba wrote:
Interesting where we are headed. In the orginal proposal for a world banking system it was stated by the TriLateral that we must LOWER THE STANDARD OF LIVING IN THE UNITED STATES. That was the year immediately before we had the debt expand the next year. If you think you will not get a lower living you are wrong. ALL power is headed that way and those that say they are not are not telling the truth of their opinion.

May 09, 2014 4:33pm EDT  --  Report as abuse
4825 wrote:
You better watch out Jack Lew. The Democrats do not want the American public to know this. Remember how the liberal Democrats whined and cried about how the Republicans are going to cause us to default on the debt, boo-hoo. So don’t whisper too loud that the payments can be prioritized. You will be fired if you are not careful Jack.

The democrats have lied to the American public for too long now. Vote very democrat out of office every chance you get, I am.

May 09, 2014 5:46pm EDT  --  Report as abuse
moonhill wrote:
Oh, I thought Obama said if that happened, the military would not get paid and Social Security recipients would not get their checks. It was all just fear-mongering and lying by this poor excuse for a president.

May 09, 2014 5:52pm EDT  --  Report as abuse
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