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GOP Emergency Debt Provision Would Put Bondholders First

First Posted: 02/02/11 12:24 PM ET Updated: 05/25/11 07:30 PM ET

Congress Returns

WASHINGTON -- Sen. Pat Toomey (R-Pa.) filed an amendment Tuesday evening that would require the U.S. government to prioritize paying bondholders over funding anything else -- including Social Security, schools, aid to veterans, or money for troops in Iraq and Afghanistan -- as a way of avoiding default on those bonds if Congress does not raise the debt ceiling.

Failing to pay those other kinds of obligations, however, would also be considered default, analysts say.

The measure was one of many unrelated amendments pegged to the Federal Aviation Administration reauthorization bill, including two health care repeal amendments that will go up for a first vote on Wednesday. Democrats have labeled the proposal by Toomey, a freshman senator and former derivatives trader, the "Pay China First Act."

The United States is expected to reach its debt limit sometime this spring, at which point the government must raise the debt ceiling to prevent defaulting on its loans. The amendment is Toomey's alternative if the debt ceiling is not raised: requiring the Treasury Department to put off its domestic obligations.

"The principal and interest on debt held by the public shall take priority over all other obligations incurred by the government of the United States," the amendment reads.

Democrats can block the amendment with a straight majority vote, meaning Toomey would need a filibuster-proof 59 like-minded senators to actually get the amendment into the final aviation bill. The bill has 18 cosponsors -- all Republicans, several of them freshmen -- but will fall short when it comes for a vote.

Republicans have said they will not allow the government to default on its loans, promising they will raise the debt ceiling before the limit is reached. But in the meantime, many have used the looming debt limit as a reason to call for substantial cuts to government programs.

Toomey acknowledges that his plan would cause massive -- and sudden -- cuts. "Projects would be postponed, some vendor payments would be delayed, certain programs would be suspended, and many government employees might be furloughed," he wrote in a Wall Street Journal op-ed announcing the bill on Jan. 25. "But it would be even worse simply to raise the debt ceiling without regaining control of federal spending."

Rep. Tom McClintock (R-Calif.) introduced a companion bill in the House of Representatives on Jan. 25.

Deputy Treasury Secretary Neal Wolin called the idea "unworkable" in a statement released last week. "Adopting a policy that payments to investors should take precedence over other U.S. legal obligations would merely be default by another name, since the world would recognize it as a failure by the U.S. to stand behind its commitments," he said. "Such a policy would also be unacceptable to American servicemen and women, retirees, and all other Americans, who would rightly reject the notion that their payment has been deemed a lower priority by their government."

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