The Treasury also has on occasion curbed borrowing to stay under the debt limit, postponing scheduled auctions of government bonds and trimming the total value sold.
The GAO found that “general uncertainty” forced the Treasury to pay millions of dollars in higher interest rates in the months leading up to debt-limit increases in the early 2000s and again last year.
As Geithner readies his cash-management tools, some Republicans are pressing him to prepare for a lengthy battle that could force Treasury for the first time since the debt limit was established in 1917 to stop borrowing and make do with tax revenue. The government is forecast to collect $2.2 trillion in taxes this year and obligated to spend $3.7 trillion. That means Geithner could cover about 60 percent of the bills.
Last month, all 47 Senate Republicans voted for a measure sponsored by Sen. Patrick J. Toomey (R-Pa.) that would require Geithner to pay interest on the debt first. At $225 billion this year, the payments would be easily affordable, said Toomey, a former bond trader who headed the anti-tax Club for Growth until his election last year. While it would be “traumatic” to slash other obligations, Toomey said, keeping interest payments current would avoid default and preserve the nation’s sterling credit rating.
“The administration has been exaggerating the consequences of all this,” Toomey said in an interview. “If we didn’t raise the debt limit when we reached it, we’d have the equivalent of a partial government shutdown, and the market knows very well that furloughing workers and suspending purchases of materials are not the same thing as defaulting on our bonds.”
During a 1985 debt-limit fight, the GAO concluded that the Treasury secretary “does have the authority to choose the order in which to pay obligations of the United States.” But Treasury officials, who declined to comment on the record for this story, have discouraged talk about prioritizing the nation’s expenses.
In addition to being politically risky, the task presents huge logistical challenges. The Treasury makes hundreds of thousands of payments each day, most processed automatically by the Federal Reserve. Interrupting payments to manage daily cash flow would be far more complex than simply cutting off, say, payments to education programs.
More to the point, Treasury officials say, prioritizing payments would not avoid default. In a January blog post, Deputy Treasury Secretary Neal S. Wolin argued that failing to meet any obligation — whether interest payments or Medicare bills — would trigger a loss of market confidence. “Adopting a policy that payments to investors should take precedence over other U.S. legal obligations would merely be default by another name,” Wolin wrote.
What are the consequences of default? There’s disagreement about that, too.
Last week, in a paper titled “The Case for Default,” a Bank of America-Merrill Lynch analyst argued that hitting the debt limit might actually be a good thing, especially if the suspension of borrowing were brief and the political battle produced a plan to balance the nation’s books.
But most analysts take a darker view. Bill Gross, who runs Pimco, the world’s biggest bond fund, said in an e-mail that failure to raise the debt ceiling would be “catastrophic — global investors would move money at the margin to countries which have their act together, interest rates might rise by 50 basis points overnight, the stock market would plunge.”
Already, some traders have begun hoarding Treasury bills and other short-term assets in case the government stops issuing new debt. For now, such “disruptions” are minor but noticeable, said Karen Shaw Petrou, managing partner of the research firm Federal Financial Analytics.
“It’s like before a thunderstorm,” she said. “The birds are quiet in the trees, and there’s a very weird mood in the market. But it hasn’t yet started to rain.”
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