Does the US Treasury have a Contingency Plan to Avert Debt Default?

Treasury officials are reportedly working on a contingency plan to stave off default in case Congress is unable to reach a decision to increase the debt ceiling by the August 2 deadline. The Treasury is looking into whether they can delay some of their payments, whether the U.S. Constitution allows for the President to ignore Congress and go ahead with issuing more debt, or whether the government has the legal authority to prioritize payments.

Debt discussions at the Treasury are being led by Mary Miller, Assistant Secretary for Financial Markets. One issue that’s been raised is whether the 14th Amendment, which states that the U.S. public debt “shall not be questioned”, means the government does not have the authority to decide to renege on its debts, making a Congressional decision not to raise the debt ceiling in order to avoid default unconstitutional. But President Obama is hoping it won’t come to a situation in which he would have to act in opposition to Congress. Obama said, “Congress has a responsibility to make sure we pay our bills. We’ve always paid them in the past.”

Another contingency being discussed is the Government Accountability Office’s 1985 ruling that would allow the Treasury, in the event of a default, to prioritize payments. However, Republican lawmakers are using this possible contingency as an excuse to remain unyielding in Congressional negotiations over how to balance the budget. Treasury officials insist there is no true alternative solution to a legislative decision to raise the debt limit.

But in order to convince Republicans to agree to increase the debt ceiling to avoid default, Obama has had to agree to cut trillions of dollars from the deficit, and as of yet, still no solution has been reached, with the deadline less than a month away.

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In August, the Treasury will bring in about $172 billion, but will owe $306 billion in payments, which it will not be able to pay unless it is allowed to borrow more money or chooses not to make certain payments, such as the $49 billion it will owe Social Security recipients that is due on August 3. While the latter decision would have a dramatically negative impact in the U.S., it would prevent the U.S. from going into default, which would likely result in investors dumping U.S. Treasuries and the dollar. Still, raising the debt ceiling is a much more desirable option.

That is why the Treasury maintains that it has no contingency plan and assures the public that Congress will vote to raise the debt limit in time — anything else would have severe economic ramifications.