What happens after Thursday without US debt deal?

DPA Washington | Updated on March 12, 2018

The US government has been on the precipice of default before — in 2011 — but never on such a narrow ledge as it stands now.

At midnight Wednesday (0400 GMT Thursday), the US Treasury will have exhausted all its “extraordinary measures” to put off the day of reckoning.

Without congressional approval to lift the debt ceiling, the government of the world’s largest economy will be unable to borrow any more money because it will have reached the $16.7-trillion limit of its legal borrowing authority.

On Thursday, Treasury will have approximately 30 billion dollars cash on hand — not enough to meet daily obligations, which can reach $60 billion, Treasury Secretary Jacob Lew has warned.

That does not mean the country will immediately go into default.

On the brink

Default will happen on the first day the Government misses paying a bill on time. That could happen anywhere from October 22 to November 1, according to the Bipartisan Policy Centre, a Washington think tank.

But it could also happen as early as Thursday, according to debt limit expert Neil Buchanan, a law professor at George Washington University.

Tax revenues will continue flowing into the coffers on an unpredictable daily basis, the Treasury says.

Revenues could help pay the $12 billion due October 23 to social security pensioners, $6 billion due on October 31 in interest payments to public bond holders, and a total $5 billion in federal salaries and health costs for the poor between the two dates, the Bipartisan Centre projected.

On November 1, bills totalling $61 billion come due all on one day for pensioners and their medical care, active duty military personnel, military retirees and veterans benefits, the centre projected.

“With revenues coming in sporadically, I can tell you for sure that sometime in that five-day working period, Treasury will not have cash on hand,” the centre’s Steve Bell said in a podcast.

May trigger panic

The prospect of default has sent shudders through the domestic and international finance system and threatens to undermine what US officials call the “full faith and credit of the United States” — the global reputation of bonds issued by the world’s largest economy as a safe harbour.

Interest rates on US bonds have already jerked upward in recent days over the uncertainty, and US President Barack Obama has warned that default would wash across credit markets, hiking interest rates everywhere — on mortgages, student loans and business borrowing.

The result could be a global recession worse than the US financial meltdown in 2008, and jeopardise the fragile economic recovery since then, Lew has warned.

Even before that, if investors wake up Thursday morning to hear Congress failed to raise the debt limit, there will be “immediate action” on the financial markets, starting in Asia, then Europe and the US, Buchanan told dpa.

“What’s going to happen on the markets is a pretty big panic,” he said.

A way out

Legal scholars point out that Obama could ignore the 1917 debt ceiling law, which is not anchored in the Constitution, and claim emergency powers to borrow money under the 14th Amendment to the Constitution. Adopted in 1868, it says: “The validity of the public debt of the United States, authorised by law ... shall not be questioned.” Obama last week rejected that option, saying that the legal controversy alone about the Treasury’s authority to issue debt would do immense “damage” to the faith and credit of the United States.

“It’d be tied up in litigation for a long time. That’s going to make people nervous,” he said. “What people ignore is that ultimately what matters is, what do the people who are buying Treasury bills think?” “There are no magic bullets here.”

Published on October 16, 2013

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