The issue isn’t default but government shutdown
Here’s a great chart from Goldman Sachs that shows how government revenues and obligations will likely match up in August:
As is clearly shown, there is enough cumulative money coming to pay interest, SS, Medicare and defense. Not that there wouldn’t be cash managements issues. That and several other issues are addressed in a Q&A from a GS report last week. Some excerpts (bold is mine):
Q: What happens on August 3 if the debt limit is not increased?
A: … Using August 2010 spending and receipts as a proxy, the Treasury will probably take in $5-$10 bn in revenue on August 3, leaving insufficient revenues to make Social Security payments partly unfunded even if all other spending is deferred. Since the Treasury has carried a minimum cash balance of about $20 bn since 2009, and currently carries a balance of $74 bn, Social Security payments might still be made by drawing down the Treasury’s cash balance.
Q: Are Treasury interest payments at risk?
A: We do not think so. … There are two basic reasons that interest payments should not be called into question: First, if the August 2 deadline is missed, it is very difficult to see the debate dragging to August 15, when interest payments are made, since we doubt there will much congressional appetite for a protracted lapse in borrowing authority. … Second, the Treasury is likely to prioritize payments. While the sharp fiscal contraction that would result from prioritization would have negative short-term economic consequences and would be difficult to implement, it nevertheless seems likely if necessary.
Q: If other non-interest payments are missed, would that constitute a default?
A: Probably not, at least from the rating agency perspective. The rating agencies have not been entirely clear on this point, but S&P, Moody’s, and Fitch all appear to view a failure to pay other obligations to be different from a default. S&P has already put the US on negative outlook due to longer-term fiscal issues, and the other two rating agencies have indicated they will move to a negative outlook if no agreement is reached by August 2.