Q&A: What happens if US breaks borrowing limit?
Without an increase in the borrowing limit, the government couldn't pay other obligations on time, such as Social Security benefits, bills from government contractors and Medicare reimbursements. Those payments are also legal obligations, Lew argues, and failure to pay them would essentially be equivalent to a default.
In any case, making some payments and not others is harder than it might sound. Treasury makes roughly 100 million payments a month. Nearly all are automated. Lew says the Treasury's computer systems aren't equipped to choose some and not others among all those outgoing checks.
And without cash in reserve, any minor glitch could cause Treasury to miss a debt payment — and default.
"Treasury would do everything in their power to not miss a debt payment," says Donald Marron, an economist at the Urban Institute and a former economic adviser to President George W. Bush. "But when you're in untested waters under a great deal of stress, bad things happen."
Q. What other problems might be raised by prioritization?
A. Consider the legal and political obstacles. The government is legally obligated to pay its contractors. If not, the contractors could sue for non-payment. And how long would members of Congress stand by as Treasury holders in China and other nations were paid interest, while payments to U.S. veterans and Social Security recipients were delayed?
Q. How would investors react if the government made its interest payments but fell behind on other obligations?
A. Badly, most economists say. If the government couldn't pay veterans' benefits, federal employee salaries or other bills, investors would almost certainly demand higher interest rates at future Treasury auctions. That would drive up the cost to taxpayers of servicing the government's debt.
A failure to pay any obligation "would severely damage perceptions of our creditworthiness," says David Kelly, chief global strategist at JPMorgan Funds.
Each week, the government issues new short-term debt and uses the proceeds to pay off maturing debt. This step doesn't increase total debt. So it would still be allowed even if the borrowing limit wasn't raised. But it's possible that not enough investors would want to buy the new debt. That would leave the government short of cash to pay off its maturing debt. The result: a default.
Q. What else could Treasury do?
A. It could make its interest payments first — then delay all other payments until it collects enough tax revenue to make a full day's payments. That would avoid choosing among competing obligations. Treasury officials favored this approach during the last borrowing-limit fight in 2011, according the Treasury Department's inspector general.
But that approach would eventually cause extensive delays. On Nov. 1, nearly $60 billion in Social Security benefits, Medicare payments and military paychecks are due. With no increase in the borrowing limit, those payments could be delayed for up to two weeks.
Q. Could the president just ignore the limit?
A. Some experts say he could. The 14th Amendment to the Constitution says, "The validity of the public debt of the United States, authorized by law ... shall not be questioned." But the White House has said its own lawyers don't think he has the authority to do so. Nor is it clear that many investors would buy bonds issued without congressional approval.
Q. Are global investors panicking yet?
A. No, not yet. The stock market surged on Thursday and Friday as Congress appeared to move closer to an agreement to raise the debt ceiling and perhaps end the partial shutdown of the government. But if prospects for an agreement were to dim early next week, stocks could sink. Investors would likely also dump Treasurys.
Interest rates on some short-term Treasurys have risen sharply in the past week. That shows that the deadline might be rattling some investors. The Bipartisan Policy Center estimates that the 2011 fight over the debt limit inflated federal borrowing costs by $1.3 billion, or about 0.5 percent, that year. Over 10 years, the estimated cost comes to nearly $19 billion.