If this isn't a bluff, then Washington's failure to strike a deal should deeply disturb the rating agencies, the market, and everybody else
Surely, the Obama administration will not allow the U.S. to default. Even if Congress fails to pass a resolution by the Treasury's August 2nd deadline (which is this coming Tuesday, by the way), surely the President will direct Treasury Secretary Geithner to prioritize debt payments above others so that the U.S. doesn't miss an interest payment. This has been a commonly held assumption of many following the debt ceiling fiasco -- and this is also what the rating agencies think. A new report, however, suggests that they could all be wrong.
Binyamin Appelbaum of the New York Times reports today that the Treasury will explain how it will pay its bills with insufficient funds later this week. But he also writes that we may already know the answer:
Officials have said repeatedly that Treasury does not have the legal authority to pay bills based on political, moral or economic considerations. It cannot, for instance, set aside invoices from weapons companies to preserve money for children's programs.
The implication is that the government will need to pay bills in the order that they come due. President Obama has warned as a result that the government "cannot guarantee" payments of Social Security benefits or other popular programs. Officials also have disputed the assertion of some Republicans that the government could prioritize interest payments.
Indeed, earlier this year one Republican, Sen. Pat Toomey introduced a bill that would have required the Treasury to prioritize debt payments above all others, in order to insure that the nation's pristine AAA-rating is preserved. The Treasury will have plenty of revenue to cover interest payments -- it just won't have enough to cover everything else as well without issuing more debt. Toomey's bill never passed.