Gov­ern­ment debt may need ‘backup plan’

Trump might have to use Obama’s pro­posal if limit isn’t in­creased

Houston Chronicle Sunday - - NATION - By Saleha Mohsin and Liz Capo McCormick

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.

‘Truly ter­ri­ble’

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.


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