February 3, 2014 / 2:10 PM / 5 years ago

Treasury's Lew warns that U.S. default could happen quickly

WASHINGTON (Reuters) - The Obama administration warned on Monday it could start defaulting on the government’s obligations “very soon” after it runs out of room to borrow under a legal cap on public debt.

United States Secretary of the Treasury Jack Lew speaks at the Bipartisan Policy Center in Washington February 3, 2014. REUTERS/Gary Cameron

Washington is due to reinstate a limit on its borrowing at the end of this week and Treasury Secretary Jack Lew said the administration can use accounting measures to stay under the new cap until the end of February.

After that time, “very soon it would not be possible to meet all of the obligations of the federal government,” Lew said at an event hosted by the Bipartisan Policy Center, a prominent Washington think tank.

U.S. politicians now partake in a regular dance around the country’s so-called debt limit. First, Congress authorizes spending that outstrips tax receipts. Then lawmakers balk over whether to OK enough borrowing to pay the bills. A rancorous debate ensues over putting public finances on a stable path.

Washington has danced perilously close to the edge of default several times since 2011, and this year some Republicans pledge to extract policy concessions from Democrats before they allow the debt limit to rise.

The administration has vowed not to negotiate on the matter, and Lew said public finances are in good enough shape that long-term fiscal problems don’t have to be solved this year anyway.

Federal debt ballooned during the 2007-09 recession and most analysts think Washington’s obligations to pay for health care for the elderly will stress the budget more as U.S. society ages.

But Lew said the sharp reduction in budget deficits over the last few years has bought America time to improve its fiscal outlook.

“I’m not sure this is the year for the long-term fiscal challenge to be dealt with,” Lew said. “We have a little time to deal with the longer term.”

It is unclear if Republicans, who are pressing for an overhaul of the government’s health care obligations, will put up much of a fight over the debt ceiling. U.S. House Speaker John Boehner, a Republican, said last month American “shouldn’t even get close to” default.


In October, Congress and the administration suspended a $16.7 trillion cap on borrowing until February 7. If the debt ceiling isn’t raised by then, Treasury can juggle money between government accounts for a few weeks to keep just under the new limit.

Once it loses the ability to borrow, Treasury would pay its bills by relying on incoming revenue and any cash left in public coffers.

No one is sure when the money would run out and lead to missed payments on everything from Social Security pensions to interest on the national debt. Lew said the end of February is a particularly bad time to start relying on a cash cushion. This is because the government at that time is mailing out tax refunds, so the Treasury thinks it would burn through its remaining cash more quickly than it would at other times of the year.

Many economists think a U.S. default could trigger a financial panic and perhaps even an economic depression, and Lew urged lawmakers to act swiftly to raise the debt ceiling.

“Unnecessary delays or political posturing ... could snowball into a manufactured crisis,” he said.

Reporting by Jason Lange; Editing by Andrea Ricci

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