WASHINGTON - By mid-February or early March, the United States could face an unprecedented default unless it raises its debt ceiling, the Treasury Department said this week.
Some legislators have theorized that a quick breach in the debt ceiling might cause only a minor disruption to government finances. And some commentators have suggested that the United States could pass legislation to prioritize or guarantee payments to bondholders, thus erasing what they describe as the worst of the financial market reaction and removing the threat of technical default.
But experts in government finance and markets described running up against the debt ceiling as an event that might quickly precipitate a financial crisis and eventually lead to a recession -- an event with far greater disruptive potential than the "fiscal cliff" package of tax increases and spending cuts, a government shutdown or even the collapse of Lehman Brothers.
A debt-ceiling crisis would be at its heart a cash-management problem. Every day the government receives millions of bills to pay, to its employees, seniors, soldiers, bondholders and contractors, among others. Under normal circumstances, it makes payments with new revenue as well as with the proceeds from bond sales. But the country has already run out of authority to issue new debt, as of Dec. 31, and Congress has not yet raised the statutory debt ceiling, currently around $16.4 trillion. The Treasury Department is undertaking "extraordinary measures," like suspending the reinvestment of certain government retirement funds, to leave it with more cash on hand. But such measures buy the country only so much time, and in a matter of weeks outflows will overwhelm inflows.
That day might be Feb. 15, for instance. According to a Bipartisan Policy Center analysis, the government expects about $9 billion in revenue to arrive in its coffers that day. But it has $52 billion in committed spending on that day: $30 billion in interest payments, $6.8 billion in tax refunds, $3.5 billion in federal salaries, $2.7 billion in military pay, $2.3 billion in Medicaid and Medicare payments, $1.5 billion owed to military contractors and a smattering of other commitments.
But there are a few clues as to how the Obama administration might react. A Treasury inspector general's report from last year described some of the planning for the debt ceiling standoff in 2011, which caused a broad slump in the market and raised the country's borrowing costs by about $1.3 billion in that fiscal year.
"Treasury considered asset sales; imposing across-the-board payment reductions; various ways of attempting to prioritize payments; and various ways of delaying payments," the report said. It determined that delaying payments might be the least harmful option, but made no decisions about the best route forward.
Moreover, "Treasury reached the same conclusion that other administrations had reached about these options -- none of them could reasonably protect the full faith and credit of the U.S., the American economy, or individual citizens from very serious harm," the report said.
A standoff in the debt ceiling -- even a brief one, with bondholders paid on time -- might also raise the country's borrowing costs permanently.
"It is not assured that the Treasury would or legally could prioritize debt service over its myriad other obligations, including Social Security payments, tax rebates and payments to contractors and employees," said Fitch, the major ratings agency. "Arrears on such obligations would not constitute a default event from a sovereign rating perspective but very likely prompt a downgrade."
For that reason, some Republicans are shying away from using the debt ceiling as leverage -- with some suggesting that a debate over the continuing spending resolution necessary to finance the government might be a better time to wrangle for budget cuts.