Treasury Secretary Tim Geithner sent yet another letter on Monday to congressional leaders pleading with them to raise the national debt limit. The third, to be exact. But this one announced that by Friday, to start buying the United States a little time before the ceiling is hit, Treasury will stop issuing the bonds that states and localities use to help finance things such as infrastructure projects. In short, the game of chicken with the full faith and credit of the United States is firmly in the fourth quarter.
Because of better than expected tax revenues, Geithner said that the default deadline had moved from about July 8 to about Aug. 2. But as The Post reported Tuesday, there are some Republicans who aren’t troubled by default. They argue that the government could prioritize its obligations, with interest payments on the debt being at the top of the list.
Call me crazy, but that’s default by another name.
Treasury is already on record saying prioritizing payments would be “a failure by the U.S. to stand behind its commitments.” Ryan McConaghy, director of the economic program at Third Way, told me this would be “inadvisable,” adding, “Prioritizing debt payments might shield our creditors, but otherwise we’d be looking at the same catastrophic impacts.”
Geithner’s Monday letter spelled out those catastrophic impacts again.
A broad range of government payments would have to be stopped, limited or delayed, including military salaries, Social Security and Medicare payments, interest on debt, unemployment benefits and tax refunds. A default on the Nation’s legal obligations would lead to sharply higher interest rates and borrowing costs, declining home values and reduced retirement savings for Americans. Default would cause a financial crisis potentially more severe than the crisis from which we are only now starting to recover.
Not only would seniors and retirees be ticked, so too would the markets. “Moving to an interest- or debt- first priority payment would be a major red flag for markets, signaling that we’re running out of financial slack and that our political system might actually fail to address this,” McConaghy said. “With the once unthinkable specter of default on the horizon, it’s likely that the markets would begin to send signals that make S&P’s outlook downgrade seem like a love tap.”
But there are folks working hard to ensure the specter doesn’t materialize. You’ve got the Gang of Six trying to put together a bipartisan plan that might be able to get bipartisan votes for passage. And you have Vice President Biden meeting with congressional leaders tomorrow tasked by President Obama to hammer out a deficit- and debt-reduction plan by the end of June. With the new Aug. 2 default deadline, they have some extra time. But as Maya MacGuineas of the Committee for a Responsible Federal Budget warns, “We need to raise the debt limit without going to 11th-hour negotiations, and we need to make fiscal improvements to our country’s unsustainable debt path. But we should make the deal today – (well, yesterday, really) – because if we wait until the last minute, we risk credit markets giving up on us.” And when that happens, today’s wrangling will look like nothing.