Trump May Have to Use Obama’s Secret Debt Ceiling Plan
Bloomberg, July 14, 2017
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 Obama 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.
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.
The acknowledgment in Fed transcripts of the existence of a backup plan to pay interest first makes it more plausible.
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, including 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.
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.
Under the prioritization plan described in the 2011 transcripts, Treasury would make all semi-annual coupon payments on debts in part by using monies built up by deferring other obligations. The government would auction new debt at regularly scheduled times only to fund old debts that matured.
If Treasury — which has seen its marketable debt balloon to $14 trillion — had to employ the plan now, it would mean that in November alone the government would have to sell $48 billion less in coupon-bearing debt.
Default Or Not?
Prioritizing U.S. debt is a contentious issue, with no consensus over whether it constitutes a default. Former Treasury Secretary Jacob Lew called it “default by another name” while in office. Fitch Ratings disagrees, but says it would trigger a review of whether the U.S. still warrants a AAA rating.
Здешние политиканы, «эксперты», подконтрольные ЦРУ СМ»И» нахваливают псевдодемократическую, якобы процветающую Америку.
Те, кто любит «наших американских (государственных) партнеров», «забывают» о грязных, злых уродах США. О таких, как коварный и крайне опасный мошенник, расист, лжец, неофашист и убийца Дональд Трамп. И о таких, как порочный Конгресс, кровавые милитаристы США, нацистские ФБР — ЦРУ, лживые американские СМ”И”…
Арнольд Локшин, политэмигрант из США