Treasury: Debt Default Would Be 'Catastrophic'

Jun 2, 2011

Treasury Secretary Timothy Geithner travels to Capitol Hill on Thursday with a warning for freshmen lawmakers: They must vote to increase the government's credit limit or risk an economic catastrophe.

Earlier this week, the House voted overwhelmingly against such an increase. Some lawmakers believe the government can leave the debt ceiling unchanged and still avoid dire consequences.

The Treasury Department is already doing a financial juggling act, since brushing up against the debt ceiling a couple of weeks ago. Officials think they can keep that act up for about two more months. By that time, either Congress has to vote to increase borrowing authority, or Assistant Treasury Secretary Mary Miller says the government won't be able to pay all its bills.

"We believe that would be quite catastrophic. That has never happened in the history of the U.S. that we've deliberately defaulted on a debt instrument," Miller said. "To default on an obligation would shake the confidence of the global financial markets. I believe it would have very long-lasting effects.

"Once you took that step, you would be unable to ever say you didn't default on something."

Some Republicans Unconvinced

But not everyone on Capitol Hill is buying that doomsday scenario.

"Failure to raise the debt limit does not equate to a default on our debt at all," said Sen. Pat Toomey (R-PA).

Toomey suggests that even if the government couldn't pay all its bills this summer, it could avoid a default by making sure what limited money is available goes to pay bondholders first. It's sort of like skimping on groceries in order to cover the mortgage. In a speech to the American Enterprise Institute, Toomey acknowledged that would create some hardships for those who don't get paid — think Social Security recipients or members of the armed forces. But, Toomey says, it wouldn't be a financial disaster.

"A disruptive series of events is not the same as a catastrophe," he said. "And we ought to keep that very much in mind."

But the Obama administration says lawmakers who want to go down that path are playing with fire. Miller says government bondholders are likely to get spooked if anyone's payments are cut off. And when bondholders get nervous, the price they demand is higher interest rates for the government and everyone else.

"Treasury rates would certainly go up as people lost confidence in Treasury bills and bonds," Miller said. "And those costs, which may look like Wall Street costs, can become very Main Street in the sense that mortgage interest rates, consumer borrowing rates, small-business borrowing would all be impacted by that."

Deal Elusive

Republican leaders say they are willing to raise the debt ceiling, but only if that move is accompanied by cuts in future government spending. House Speaker John Boehner (R-OH) pressed that point Wednesday when he and his fellow House Republicans met with President Obama.

"We had a very frank conversation. I thought it was productive," Boehner said. "I'm looking forward to more serious conversations about how we reduce the deficit and the debt and to get our economy going again and creating jobs."

Many of the economic indicators in recent weeks have been worrisome, with a still-sputtering job market and a 9 percent unemployment rate unlikely to drop much anytime soon.

White House spokesman Jay Carney says even as the president looks for ways to compromise with Republicans on government spending cuts, he's trying not to slam the brakes on the fragile economic recovery.

"The president's view is that we should do nothing in these talks that undermines some of the foundation that we have to have in order to grow in the 21st century," Carney said. "And that's why he feels very strongly we need to protect investments in education, research and development, and infrastructure."

But House Republican leader Eric Cantor (R-VA) was skeptical of the president's priorities when he recapped the meeting Wednesday in the White House driveway.

"The president talked about a need for us to continue to, quote, unquote invest from Washington's standpoint. And to a lot of us, that's code for more Washington spending — something that we can't afford right now," Cantor said.

Vice President Joe Biden has been leading a bipartisan team of lawmakers in search of a budget compromise, which could pave the way for raising the debt ceiling. The group's next meeting is a week from Thursday. But with few obvious signs of agreement, it appears the Treasury's juggling act will continue.

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