Treasury Secretary Jack Lew plans to warn lawmakers Thursday that he will be unable to guarantee payments to any group — whether Social Security recipients or U.S. bondholders — unless Congress approves an increase in the federal debt limit.
With Washington in gridlock and a key deadline in the debt-limit debate just one week off, Lew plans to tell a Senate panel that he would do all he can to minimize the pain of breaching the $16.7 trillion debt limit, according to Treasury officials briefed on the testimony. But Lew will also note that in an unprecedented situation in which he would be relying entirely on the erratic flow of incoming revenue, the economy would suffer and there would not even be certainty that the government could make all interest payments.
“No credible economist or business leader thinks that defaulting is good for job creation or economic growth,” Lew will say, according to excerpts of his remarks released in advance of the hearing. “If Congress fails to meet its responsibility, it could be deeply damaging to the financial markets, the ongoing economic recovery, and the jobs and savings of millions of Americans.”
With anxiety growing about that outcome, Republicans in the House and the Senate were floating ideas Wednesday for raising the debt limit — if only for a short time — in hopes of forcing President Obama to the negotiating table.
One of the most significant ideas was brewing in the House, where Budget Committee Chairman Paul Ryan (R-Wis.) briefed conservatives on a plan to raise the debt limit for six weeks, which would give party leaders time to negotiate a broad agreement to overhaul the tax code and trim federal health and retirement spending.
The plan, which Ryan sketched in a Wall Street Journal opinion piece Wednesday, was short on details. And it called for spending cuts of roughly $200 billion to cover the cost of raising the debt limit even in the near term — although senior GOP advisers said late Wednesday that they were also considering an increase with no strings attached.
House Republicans have scheduled a private meeting early Thursday to review their options.
Lew’s appearance before the Senate Finance Committee will be the first public confrontation between a senior administration official and Republicans since the fiscal showdown began last month. The meeting comes as some lawmakers on Capitol Hill are questioning whether the administration has been too alarmist about the threat of going past an Oct. 17 deadline to raise the debt ceiling. Republicans have cited reports by credit-rating firms saying that the United States would not technically default unless it fails to make interest payments on its debt — which they regard as unlikely.
Echoing points made by Republican presidents and officials in prior administrations, Lew is likely to counter that argument by highlighting the broad risks of leaving the government with no borrowing authority, the officials say.
“Certain members of the House and Senate believe that it is possible to protect our economy by simply paying only the interest on our debts, while stopping or delaying payments on a number of our other legal commitments,” he will say, according to the excerpts. “The United States should not be put in a position of making such perilous choices for our economy and our citizens. There is no way of knowing the irrevocable damage such an approach would have on our economy and financial markets.”
A Treasury official, speaking Wednesday night on condition of anonymity, said Obama would have to make the final decision in such a scenario.
Officials say Lew is likely to point out that the Treasury routinely refinances about $100 billion in debt every week, paying back principal and taking on new debt. He will note that should investors back away from Treasury debt, it could make refinancing difficult and throw the country’s financial markets into even greater chaos, the officials say.
Lew is also likely to insist that the administration will face a series of difficult decisions even if Treasury can avoid what the credit-rating firms consider a default. In a scenario where federal spending will far exceed revenue, he is planning to say that the administration would have only imperfect options in deciding whom to pay. Officials say he will push Republicans to decide whom they wouldn’t pay — Social Security recipients or veterans.
“We are relying on investors from all over the world to continue to hold U.S. bonds…,” Lew will say, according to the excerpts. “If U.S. bond holders decided that they wanted to be repaid rather than continuing to roll-over their Treasury investments, we could unexpectedly dissipate our entire cash balance.”
Lew will confront a Senate Finance Committee stocked with Republicans who have been skeptical about the administration’s claims that breaching the debt limit would be catastrophic.
Among the committee’s members is Sen. Patrick J. Toomey (R-Pa.), who has championed the notion that the Treasury Department could avoid chaos in financial markets by continuing to make interest payments to investors.
The senior Republican on the panel, Sen. Orrin G. Hatch (Utah), has also expressed doubts about the risk of a debt-ceiling breach. But on Wednesday, Hatch acknowledged that blowing the Oct. 17 deadline would “scare the hell out of people.” And while Treasury might be able to pay interest on the debt, Hatch said, “the real question is whether it’s going to tank the stock market.”
Obama, when he meets Thursday with House GOP leaders, is planning to emphasize his refusal to “pay ransom” to avoid default and reopen the government. Ryan, nonetheless, held out hope that “tomorrow’s meeting at the White House will allow us to work together and find common ground.”
Thursday’s meeting is the second in a series the White House announced Wednesday aimed at breaking the impasse, reopening the government and raising the $16.7 trillion debt limit. Obama met first with House Democrats late Wednesday and plans to meet with each party in the Senate in the coming days, starting with a meeting with the Senate Democratic caucus Thursday.
Obama invited the entire 233-member GOP House conference to join him at the White House, but Republicans decided to send only an 18-member group comprising top leaders and key committee chairmen, including Ryan, Appropriations Chairman Harold Rogers (Ky.) and Ways and Means Chairman Dave Camp (Mich.).
“Nine days into a government shutdown and a week away from breaching the debt ceiling, a meeting is only worthwhile if it is focused on finding a solution,” Brendan Buck, a spokesman for House Speaker John A. Boehner (R-Ohio), said in a statement. “That’s why the House Republican Conference will instead be represented by a smaller group of negotiators.”
The White House said Obama is “disappointed” by Boehner’s decision to limit Republican attendance and emphasized that Obama will not be negotiating.
“The president thought it was important to talk directly with the members who forced this economic crisis on the country about how the shutdown and a failure to pay the country’s bills could devastate the economy,” White House press secretary Jay Carney said in a statement.
Obama “will talk to anyone anytime . . . but will not pay the Republicans ransom for doing their job,” Carney said. “If the Republicans want to have a real discussion, they should open the government and take the threat of default off the table.”
Republicans on Capitol Hill, meanwhile, circulated a memo from one of the nation’s leading credit-rating agencies that seemed to play down the threat of default. In the memo, Moody’s Investors Service said the Treasury Department is likely to continue paying interest on the government’s debt even if Congress refuses to lift the limit on borrowing, preserving the nation’s sterling AAA credit rating.
“We believe the government would continue to pay interest and principal on its debt even in the event that the debt limit is not raised, leaving its creditworthiness intact,” said the Oct. 7 memo. “The debt limit restricts government expenditures to the amount of its incoming revenues; it does not prohibit the government from servicing its debt. There is no direct connection between the debt limit (actually the exhaustion of the Treasury’s extraordinary measures to raise funds) and a default.”
The memo offered a starkly different view of the consequences of breaching the debt limit than is held by the White House, many policymakers and other financial analysts. Over the weekend, economists at Goldman Sachs said the economy would take a devastating hit even if Treasury kept making payments on the debt, because the pullback in federal spending would amount to roughly $175 billion, or 4.2 percentage points of gross domestic product.
Mohamed El-Erian, the chief executive of PIMCO, the world’s largest bond company, agreed that the administration could take steps to contain the worst damage. But, he said, there would still be severe consequences.
“It would avoid a series of major and cascading disruptions to the functioning of a financial market that is at the heart of the core of the global financial system,” he said. “Having said that, equities and other risk assets would still likely sell off hard.”
Rep. Chris Van Hollen (D-Md.) noted that Moody’s analysis is geared toward the well-being of its own investors, not average Americans. “When they say their clients will be okay, they’re not talking about people on Society Security, Medicare or our troops in the field. Moody’s doesn’t give a damn about any of those people.”