Government debt may need ‘backup plan’
Trump might have to use Obama’s proposal if limit isn’t increased
WASHINGTON — Deep within the Treasury Department sits a once-secret plan written by the Obama administration that could lead to the first-ever default on U.S. debt. Bond traders are worried that Donald Trump’ s Treasury secretary may have to use it.
The U.S. government will reach its statutory limit on borrowing some time in October, the Congressional Budget Office estimates. The Trump administration has asked Congress to raise the ceiling before then, but it is running into the same complications the O ba ma White House encountered: lawmakers, mostly Republicans, who want to use the debt limit as leverage for controversial policy changes.
Treasury Secretary Steven Mnuchin has said there are “plans and backup plans” to keep the government solvent through September. Bond traders suspect he is referring to preparations made in 2011 in case the Obama administration had to prioritize payments on government securities over other obligations. The Treasury chief got fresh hope that Congress may raise the debt limit before leaving for its August recess after Senate Majority Leader Mitch McConnell delayed the break by two weeks.
When the nation almost breached its debt ceiling six years ago, the Federal Reserve and Treasury drew up contingency plans that were kept secret until January, when transcripts of an Aug. 1, 2011, conference call at the central bank were released after a customary five-year lag.
One day before protracted negotiations concluded with Congress raising the debt ceiling, Fed officials were briefed about how its staff and Treasury officials had worked together to develop a plan to handle debt payments in the event they had to be “prioritized or at least not fully paid,” the transcripts say.
Under the contingency plan, holders of U.S. debt and recipients of Social Security,veterans benefits and other entitlements would be paid first. Everyone else, such as government contractors and federal employees, would be at risk of payment delays or partial payments.
Though the scenario nominally protects holders of U.S. debt by prioritizing the payments they are due, it raises fears that the value of their underlying assets could suddenly decline if the U.S. government’s reputation for creditworthiness is damaged.
“I’ m assuming that prior itiza ti on is the fall back ,” said Lou Crandall, chief economist at Wrightson ICAP LLC. The acknowledgment in the Fed transcripts of the existence of a backup plan to pay interest first makes it more plausible, he said, calling it a “truly terrible idea.”
It was in 2011 that U.S. debt was downgraded for the first time by S&P Global Ratings. If the secret debt prioritization plan has to be used by the Trump administration, the nation’s credit rating may well be downgraded again, some analysts say.
‘Raise the ceiling’
M nu chin said in his January confirmation hearing that he would not prioritize debt payments, should the borrowing limit be breached. But more recently, he has demurred.
“Congress should raise the ceiling so that we don’t have to talk about prioritization,” he said, declining to directly answer a question about the possibility.
However, he has consistently said the U.S. “should be paying our bills when they’re due, and we shouldn’t put the government at risk.”
In response to questions about the Treasury’s position on prioritization, a spokeswoman referred to Mnuchin’s previous comments urging Congress to raise the debt ceiling quickly and insisting that the U.S. should pay its debts on time. Fed board spokesman David Skidmore declined to comment.