Geithner also has authority to pay investors first for interest they’re owed on the debt, according to a decades-old legal opinion. A growing number of conservatives argue that by making interest payments first, the government could avoid default and the Obama administration’s predictions of economic Armageddon.
But the nation could pay a substantial price in the form of higher interest rates if it relied for long on such evasive maneuvers, the Government Accountability Office said in a recent study. And financial analysts say market confidence could be shattered if Geithner had to cut off pay to combat troops or stop writing Social Security checks — even if he never missed an interest payment.
“I think the failure to meet any commitment would be viewed by the markets as default and would be deeply unnerving,” said Robert Rubin, who, as Treasury secretary in the mid-1990s, prevented the debt from breaching the limit during the longest battle over the issue on record.
“We don’t know” what would happen in the event of default, Rubin said. “But I think it is totally irresponsible to take the risk of trying to find out.”
Markets are already uneasy about the looming battle over the debt ceiling, which promises to consume Congress when lawmakers return next week from their Easter break. Republican leaders are demanding strict controls on spending as a condition for raising the ceiling; Democratic leaders want a
deficit-reduction trigger, which would automatically cut outlays and raise taxes if certain budget goals aren’t met.
The debt is forecast to hit the limit in mid-May. Geithner has said he can keep the wolf from the door until early July.
So far, the Treasury has nearly drained a $200 billion cash-management account at the Fed, providing a cushion of money to pay bills without new borrowing. Next, Geithner is likely to take a series of “extraordinary actions,” such as suspending the issuance of special securities that help state and local governments manage their own finances. Once the debt hits the limit, Geithner may declare a “debt issuance suspension period,” permitting him to borrow from the pension fund for federal workers.
Rubin pioneered these strategies in 1995, at the start of the budget battles between President Bill Clinton and Republicans led by House Speaker Newt Gingrich (R-Ga.). As the fight dragged on through two government shutdowns, Rubin had to juggle the nation’s bills for 135 days. Finally, Clinton threatened to delay Social Security checks, spurring Congress to approve more borrowing to make sure the checks went out on time.