BUSINESS

Treasury Department Will Soon Announce Backup Plans With No Debt Deal In Place [UPDATE]

07/28/2011 01:19 pm ET | Updated Sep 27, 2011

With less than a week until the August 2 deadline to raise the debt ceiling, the Treasury Department is said to be weighing its choices about whom it will be able to pay if Congress does not reach a deal to extend its borrowing authority.

The Treasury is expected to have $172 billion at its disposal for the month of August, according to estimates from the Bipartisan Policy Center. But it will be obligated to pay out $306 billion -- meaning that it will be unable to honor about 45 percent of its debts.

UPDATE: 6:53 p.m. -- The Treasury will prioritize interest payments to U.S. bondholders if a deal to extend the debt ceiling is not reached, an anonymous administration official has told reporters.

The Treasury has offered few hints about what it would do in the event that a debt-ceiling deal is not reached. But officials and anonymous sources within the department have indicated that the Treasury will clarify its plans this week if there is no forward motion on a deal, according to The New York Times and Reuters.

Should the Treasury be forced to pursue a strategy of “prioritization” -- that is, picking and choosing which of its bills to pay -- it’s widely expected that its first order of business would be to continue paying interest to U.S. bondholders.

Such a course of action would avoid a national default, but it’s unclear who else would be paid in that scenario. Soldiers, Social Security recipients and government employees are among those facing a cessation of payment if the Treasury is forced to prioritize.

A Bipartisan Policy Center analysis suggests that the U.S. can choose to fund “selected big ticket programs,” including Social Security, Medicare, Medicaid, defense contracts and unemployment insurance. But then it would miss payments to soldiers, veterans and government agencies, including the Departments of Energy, Education and Health and Human Services.

“Even if you did everything proportionally, you’re looking at nearly a 45 percent cut across the board," Andrew Fieldhouse, a federal budget policy analyst at the Economic Policy Institute, told The Huffington Post. "The government sends out more than 80 million checks a month. Cutting that by 45 percent, you’re going to have a lot of unhappy taxpayers out there.”

In June, Treasury Secretary Timothy Geithner issued a strongly worded criticism of one prioritization proposal from a group of Senate Republicans. The senators, led by Jim DeMint of South Carolina, called upon the Treasury to agree to continue paying down the country’s debt in the event that a deal is not reached.

In a letter, Geithner called this a “radical and deeply irresponsible” approach, and said that “there is no credible budget plan under which a debt limit increase can be avoided.”

Analysts at Nomura and Barclays Capital have suggested that the government may actually have until August 9 or 10 to reach a deal, although the Treasury has not revised its predicted deadline of August 2.

As of Thursday morning, the House of Representatives was considering a bill from Speaker John Boehner that calls for $900 billion in spending cuts and a modest increase of the debt limit. Senate Democrats have indicated they will unanimously oppose the bill.

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