* Contingencies eyed if Congress fails to raise debt limit
* Treasury, Fed officials focused on default options
* Top Republican says Congress should see plans
* Officials stress failure to raise debt limit disastrous
By Tim Reid and Jonathan Spicer
WASHINGTON/NEW YORK, Oct 9 U.S. Treasury and
Federal Reserve officials worried about the growing possibility
of a catastrophic default are crafting contingency plans to
mitigate the economic fallout if Congress fails to extend
America's borrowing authority, a source familiar with the plans
With just eight days before the Treasury Department says the
U.S. will hit its $16.7 trillion borrowing limit, lawmakers and
the White House remain far from a deal to extend it. Officials
are examining what options might be available to calm financial
markets if a U.S. debt payment is missed.
The specifics of their planning remain unclear, but the
source said an area of special focus is a key bank funding
market known as the tri-party repurchase agreement, or repo,
market, where banks often use Treasury bills, notes and bonds as
collateral for short-term loans from other banks and big money
Some of the earliest alarm bells for the 2008 financial
crisis emerged from this market, and on Wednesday interest rates
demanded for accepting some T-bills as collateral shot to the
highest in five months. Were the repo market to seize, easy
access to cash by banks to meet short-term funding needs could
be jeopardized, and that could have far-ranging implications for
credit markets and the economy.
The source, who asked not to be identified, said officials
refused to divulge details of the plans because they do not want
to suggest to investors and Republican Congress members that
the U.S. government can muddle through if the debt limit is not
raised. Officials insisted there was no way to avoid an eventual
default if the debt limit is not raised.
On Thursday, U.S. Treasury Secretary Jack Lew is scheduled
to testify before the Senate Finance Committee and is likely to
be grilled about the contingency plans by Senator Orrin Hatch,
the panel's top Republican.
The source said officials believe their plans can only try
to mitigate fallout they expect to be catastrophic if Congress
fails to raise the debt limit by Oct. 17, the date Treasury
estimates it will run out of additional borrowing authority.
Against that anxious backdrop, officials are trying to gauge
which Treasury securities pledged as collateral would cause the
most concern in a default, the source said.
Many of the discussions are between Treasury officials in
the Office of Debt Management and the Federal Reserve Bank of
New York, which acts as the government's agent in the markets.
The New York Fed's Fedwire Securities Service is used to settle
loans in the $5-trillion repo market.
Spokeswomen for the Treasury and the New York Fed declined
to say if contingency plans were being discussed or in place.
The Treasury representative referred to remarks made by Lew in a
recent letter to Congress. Lew said: "There are no other legal
and prudent options to extend the nation's borrowing authority."
In another recent letter to Congress, Lew wrote: "Any plan
to prioritize some payments over others is simply default by
another name." He added: "There is no way of knowing the damage
any prioritization plan would have on our economy and financial
In the run-up to the 2011 debt-limit crisis, the Treasury
looked at a range of options including delaying payments, asset
sales and prioritizing payments, according to an inspector
general's report last year.
According to the report, "Treasury officials determined that
there is no fair or sensible way to pick and chose among the
many bills that come due every day." The U.S. Treasury makes
roughly 80 million payments a month.
The Securities Industry and Financial Markets Association, a
trade group that represents hundreds of securities firms, banks
and asset managers, said last week it has drawn up plans that
might make a debt default less chaotic.
These plans would hinge on Treasury giving a day's advance
notice that it would be missing a scheduled payment. This would
allow dealers to configure systems to handle defaulted
securities so they still might be used in transactions,
including in the repo market.
The trade group's working presumption was that the Treasury,
each night before it believed it would miss a payment, would
announce that it would pay creditors one day late, according to
SIFMA Managing Director Rob Toomey.
Already signs of stress are evident. Overnight interest
rates in short-term funding markets shot higher on Wednesday as
default worries spread. Traders in the repo market said some
money funds and banks are starting to refuse to accept T-bills
maturing in coming weeks as repo collateral. [ID: nL1N0HZ0VS]
On Tuesday night, Hatch, sent a letter to Lew and other
members of the government's Financial Stability Oversight
Council, demanding to know what contingency plans are in place
in the event of a default.
The letter referred to minutes of a Fed video conference
meeting with Treasury officials on Aug. 1, 2011, at the height
of the last debt limit crisis.
Those minutes reveal that in that meeting, Treasury and Fed
officials discussed contingency plans that had been developed in
the event of a default.
Those contingencies, according to the minutes, included
"plans that the Federal Reserve and the Treasury had developed
regarding the processing of federal payments."
The 2011 backup plan also included "possible actions that
the Federal Reserve could take if disruptions to market
functioning posed a threat to the Federal Reserve's economic