07/07/2011 10:22 am ET | Updated Sep 06, 2011

Debt Limit Emergency Plan Won't Prevent Crisis, Treasury Says

With lawmakers in Washington having still not struck a deal to raise the nation's legal borrowing limit, officials in the Treasury Department are sketching out ways to avert financial disaster if Congress doesn't act on time, Reuters reports.

But the existence of these secret talks doesn't affect the urgency of the debate. The only way to prevent a U.S. government default, an event that could spark a widespread panic and lead to another financial crisis, is to raise the debt limit on time, a Treasury spokesperson told Reuters and Bloomberg.

"There is no alternative," spokesperson Colleen Murray said.

Lawmakers have been locked in heated deliberations over the past several months, as Republicans have refused to raise the total amount the nation can borrow, unless that deal comes with measures intended to trim the federal deficit, such as spending cuts. Top economic officials in the Obama Administration and a host of independent economists and financial experts have criticized the tactic, arguing that the debt limit should be raised promptly and kept separate from other issues.

"The debt ceiling should not be something that is used as a gun against the heads of the American people to extract tax breaks for corporate jet owners," President Obama said Wednesday during his Twitter town hall discussion.

But with no agreement in Congress and the date drawing ever closer, the Treasury is studying its options, such as whether a Constitutional amendment upholding the integrity of the nation's debt allows the government to continue making debt payments, Reuters says.

Another potential emergency plan would be delaying other payments, such as Social Security checks, in order to service the debt. But as economists have noted, that itself could cripple the economy, wounding American confidence and robbing them of buying power.

The nation reached its legal borrowing limit in May, and the Treasury initiated a series of "extraordinary measures" to buy some time and temporarily allow the government to keep borrowing money to pay for its obligations.

If the limit isn't raised by August 2, the government will be forced to abruptly freeze spending, the Treasury has said. That could involve a default on the nation's debt.

And if payments to investors are late, that would likely cause interest rates on Treasury debt to skyrocket, raising rates across the board and potentially choking the flow of money through the economy. U.S. government paper is considered the safest investment in the world, and its interest rates are determined by factors like investor demand, or the expectation of inflation in the future.

The plans for what to do if the limit isn't raised, moreover, might not avert disaster. Even the officials making the plans aren't sure how they would play out.

"It was not obvious to them that the president has the legal authority to pick and choose who gets paid," former Treasury official Michael Barr told Reuters. "It is not obvious that even if they had legal authority, that as a practical matter you can do it."