The U.S. Treasury will run out of cash and the authority to borrow unless Congress acts this week, raising the prospect of an unprecedented governmental default on at least a portion of $16 billion in interest payments on the national debt due Friday.
Failure to pay the interest owed to lenders could create chaos in financial markets, force the government to pay higher interest rates in the future and open the government to massive damage suits, analysts said.
Treasury Secretary James A. Baker III warned Friday that a U.S. government default would have "swift and severe repercussions both domestically and internationally."
"It would be an absolute disgrace if the United States defaulted for the first time in its over 200-year history," he said. "But that's very possibly what we are looking at and it certainly is what we are looking at in the absence of congressional action."
Treasury officials estimate they will have $9 billion on hand Friday to cover the $16 billion in interest payments plus all other normal daily expenses. Should it run out of cash, the Treasury is legally obligated to notify the Federal Reserve Board and, through it, the nation's banks. Once that happens, no one holding a federal check, including military payroll checks to be issued Friday, would be able to cash it.
On Thursday, the government will run out of authority to spend money because most appropriations bills for this fiscal year have not been approved by Congress and a continuing resolution giving temporary spending authority expires that day. A short-term extension of the continuing resolution could be passed by Thursday.
When spending authority expired in November 1981 and October 1984, the government sent home nonessential employes. On those occasions, however, there was no question of a default on the debt.
"If the Treasury doesn't pay the interest, somebody would be missing quite a few billion bucks," said William C. Melton, an economist with Investors Diversified Services, a money management firm with extensive holdings in government securities.
The failure could possibly cause some bankruptcies in the private sector, if the owners of the securities are unable to find cash elsewhere. Meanwhile, the nation's financial structure could face a major upheaval as investors seek to protect themselves, analysts said.
Investors have been so confident of the ability of the government to meet obligations that they routinely use Treasury securities as a form of interest-bearing cash that can be turned into actual cash on a moment's notice.
"The reason the Treasury gets such a low interest rate on its borrowing is that payments are made absolutely without question," Melton said. Once an element of risk is introduced, those interest rates will go up, though how much is impossible to predict, he added.
Another analyst, David Wyss of Data Resources Inc., agreed. "If people start losing confidence in government securities, that could increase the cost of borrowing pretty substantially," he said. "It would also give countries like Brazil a nice precedent to cite the next time they wanted to hold up paying their loans."
In recent weeks, the Treasury avoided running out of cash or missing interest payments through a variety of techniques, including cashing in Treasury securities held by the Social Security Trust Fund and borrowing through the Federal Financing Bank, whose debt is not subject to the debt limit of $1.823 trillion. At the end of September, various trust funds held $300 billion worth of government securities, with $130 billion of that in federal employe retirement funds.
Baker has told Congress the Treasury will not continue to engage in these sorts of schemes to avoid debt-limit restrictions. Baker maintains that the only flexibility he has remaining would be to start selling U.S. gold reserves, an option he says the president has rejected.
Furthermore, analysts said the government could not arrange the sale of a sufficiently large quantity of gold overnight if Congress fails to raise the debt limit by Thursday.