Debt ceiling delay would be 'chaotic'

@CNNMoney June 28, 2011: 3:16 PM ET
Debt ceiling crisis would be 'chaotic'

One estimate of the hard choices Treasury could face if Congress fails to raise the debt ceiling.

NEW YORK (CNNMoney) -- Here's what Americans can look forward to if lawmakers fail to raise the debt ceiling in time: Treasury would not be able to pay between 40% and 45% of the 80 million payments it needs to make every month.

That's the estimate from a new analysis by the Bipartisan Policy Center, a think tank in Washington founded by four former Democratic and Republican Senate majority leaders.

A delay in raising the debt ceiling could affect Social Security checks, food stamps, federal worker and military paychecks, government contractor bills and payments to Medicare and Medicaid providers.

"Handling all payments for important and popular programs (e.g., Social Security, Medicare, Medicaid, defense, active duty pay) will quickly become impossible," the report's authors noted.

Treasury Secretary Tim Geithner has said that by Aug. 2 he will no longer have enough money on hand every day to pay all the government's bills in full and on time. The government reached the legal borrowing limit on May 16 and has been taking "extraordinary measures" since to keep the country out of default.

To ensure it has enough cash on hand to make a $29 billion interest payment to investors on Aug. 15 -- among other payments -- the government would have to defer 44% of federal spending, and that would affect the broader economy, according to the BPC study.

Treasury is expected to update its estimate of the so-called "drop dead date" at the start of July, but no one expects the date to change much.

It's impossible for anyone to know exactly how much the government will take in and have to pay out on any given day in August. The BPC based its estimates on the revenue and outlays reported by Treasury from August 2009 and August 2010.

Bond experts to Congress: Don't mess it up

It's also impossible to say yet just how the government would prioritize payments. It's fair to assume, however, that picking who gets paid and who gets put off will be a mess technically and socially because it's never been done before.

"The reality would be chaotic," the report states.

The going assumption is that Geithner will do everything he canto pay bond investors, so the country doesn't go into a formal default.

"The Treasury Secretary will squirrel away money like -- well, a squirrel. He may have to delay some payments starting days or weeks early to prepare for big important payments later," said Joe Minarik, who served as the chief economist of the White House Budget Office in the Clinton administration.

And as the BPC study noted, the whole event could cause a public uproar and market unrest, the outcomes of which is anyone's guess. To top of page

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