Counterparties: Prioritization nation
Welcome to the Counterparties email. The sign-up page is here, it’s just a matter of checking a box if you’re already registered on the Reuters website. Send suggestions, story tips and complaints to Counterparties.Reuters@gmail.com.
House Republicans are reportedly threatening to force a government shutdown — or even a default — to get the spending cuts they want.
This is all about the debt ceiling, of course. The US hit its statutory spending limit on December 31; since then, the Treasury Department has been using a series of “extraordinary measures” to keep the country from defaulting. Those measures, Treasury Secretary Tim Geithner, said into a letter to House Speaker John Boehner yesterday, could expire in mid-February. If they do, some 80 million payments a month could be at risk. Geithner does not say bond payments could be at risk, but that didn’t stop Fitch warning that it — just like S&P, last time around — might downgrade the USA as a result.
A bill resurrected by Republican Senator Pat Toomey would require Treasury to prioritize general debt obligations — think bond payments — any time the US hits the debt ceiling. In 2011, Treasury suggested this kind of prioritization is “default by another name.” Similarly, Keith Hennessy, a former Bush Administration economist, says that “the sanctity of contracts and the US government’s credibility” are at stake: not paying benefits or bills, he writes, would be ”the first step to becoming a banana republic”. President Obama echoed this critique yesterday in a press conference.
In practice, as Derek Thompson says, prioritization is frightening. “Some days, the government would get enough money to pay Social Security checks and Medicaid providers,” he writes. “Other days it wouldn’t”. And that’s assuming prioritization is even possible. Brad Plumer notes that every day Treasury gets about 2 million invoices from government agencies, which are processed automatically “dozens of times per second”. No one knows whether it’s is legal or even possible to pay bondholders with certainty while deprioritizing everyone else owed money by the government. JD Foster at the Heritage Foundation, for his part, thinks the Treasury Department will always pay bondholders first, even if the legality of doing so is murky.
The best outcome, of course, is that Congress votes to raise the debt ceiling before any such measures become necessary. For the other possible outcomes, check out Quartz’s Choose Your Own Adventure-style chart. — Ryan McCarthy
On to today’s links: